The recent surge in small-cap stock prices has led to significant valuation increases, prompting mutual fund houses to take action to protect investor interests. Recognizing potential risks, certain asset management companies (AMCs) have restricted lump sum investments in small-cap funds. This move aims to mitigate volatility and safeguard investor capital amidst concerns of overvaluation.
Gurmeet Singh Chawla, Director at Master Capital Services Ltd., highlighted the rationale behind limiting lump sum investments, citing heightened volatility, limited free float, and risk factors such as political events. In response to soaring small-cap valuations, Ravi Singhal, CEO of GCL Broking, emphasized the need for caution, noting the substantial returns and escalated valuations in this segment.
Market regulator SEBI has directed mutual funds to conduct stress tests focusing on small-cap stocks to ensure sufficient liquidity during market downturns. With small-cap stocks typically exhibiting low free float, significant outflows could elevate the impact cost, potentially resulting in investor losses.
Mukesh Kochar, National Head of Wealth at AUM Capital, highlighted challenges faced by fund managers in finding reasonably valued stocks amidst soaring AUM in small-cap and mid-cap schemes. Consequently, restricting fresh inflows into these funds is deemed prudent.
Kotak Mahindra Asset Management Company and Nippon India Life Asset Management are among the firms that have imposed restrictions on lump sum investments in small-cap funds. Tata Mutual Fund also announced similar measures last year, ceasing to accept lump sum and switch-in investments in its Small Cap Fund.
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