AMCs may impose terms and conditions to exit small, midcap MFs after SEBI's bubble remark: Report

Small and midcap schemes can impose  restrictions on redemptions, restrict ithdrawals, and raise exit loads in a bid to maintain a balanced liquidation of the portfolio in times of market crises to protect all investors. These guidelines are part of the new investor protection policies introduced by mutual fund trustees.

Earlier this month, Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch raised concerns over stretched valuations of small- and mid-cap stocks, which are generally favoured by retail investors. She said: “There are pockets of froth in the market. Some people call it a bubble, some may call it froth,” Buch told reporters in Mumbai. “It may not be appropriate to allow that froth to keep building.” 

“A bubble will burst because, by definition, bubbles burst. So, when they burst, they impact the investors adversely and that’s not a good thing,” she added.
 
Sebi and the AMFI (Association of Mutual Funds in India) have directed mutual funds to provide additional disclosures for small- and mid-cap funds from this month.

Following this, the policies for small and midcap schemes were prepared by MF trustees, Business Standard reported.

Assets under management (AUM) of small-cap and mid-cap schemes were at Rs 2.49 lakh crore and Rs 2.94 lakh crore, respectively, in February 2024. Both are records for the two investment categories. In calendar year 2023, smallcap and midcap funds accounted for 40% (Rs 64,000 crore) of net inflows into active equity schemes.

The policies released by the trustees are focused on two aspects: Managing inflows by placing caps on investments and ensuring that all investors are protected during market crashes.

Some policies, such as those of Nippon India MF, DSP MF, and Quant MF, state that the fund house may impose restrictions on withdrawals according to Sebi norms, after approval from their board and trustees. Other fund houses have implied the same, stating that they may take measures to manage outflows as per applicable norms. 

MF regulations permit imposing limits on redemptions during situations causing a systemic crisis or market liquidity constraints. Funds can restrict redemptions for 10 working days, allowing withdrawals up to Rs 2 lakh daily. Additional measures may involve higher exit loads and capped employee withdrawals.

“In case of extraordinary circumstances, the Unitholder’s Protection Committee, if deemed necessary, would subject withdrawals from Quant Small Cap & Quant Mid Cap schemes by employees, trustees, directors, management of AMC (asset management company) & group companies of AMC to compliance approval so that persons within the AMC are not able to take undue advantage at the cost of continuing investors,” the policy paper released by Quant MF stated.

The DSP MF's policy stated that the fund management team should adopt prudent liquidation of stock positions in the portfolio.

“In case of 5 per cent or more net outflow on any particular day, the fund management team should adopt prudent liquidation of stock positions in the portfolio and ensure that the characteristic of the portfolio with respect to liquidity and quality should not be skewed or majorly affected post-redemption,”the DSP MF’s policy stated.

Other measures listed by trustees include broadening the investor base to manage investor concentration, improving liquidity management, and focusing on investor awareness.