SEBI asks AMCs for more disclosure on risks linked to small, mid-cap funds

The Association of Mutual Funds in India (AMFI) has directed asset management companies (AMC) to frame a policy to protect the interest of investors in small and mid-cap mutual fund schemes, following a directive from market regulator Securities & Exchange Board of India (SEBI).

Mutual fund houses have been asked to divulge more information regarding small and mid-cap schemes and take proactive measures like moderating inflows and portfolio rebalancing to protect investors' interests.

The inflow into small and mid-sized mutual funds has seen a spike in recent months, leading to concern about their capabilities to withhold the shock in case of sharp market selloffs.

AMFI's letter to the AMCs came after capital market regulator SEBI wrote to the apex body of mutual funds highlighting the concern.

AMFI has also directed the fund houses to protect investors from the first-mover advantage of redeeming investors. "In the context of the froth building up in the small and midcap segments of the market and the continuing flows in the small and midcap schemes of mutual funds, Trustees, in consultation with Unitholder Protection Committees of the AMCs, shall ensure that a policy is put in place to protect the interest of all investors," the AMFI said in its letter dated February 27.

The proposed policy has to be approved by the Trustees and disclosed on each AMC's website within 21 days.

Ahead of SEBI's directions, Kotak Mahindra Mutual Fund had announced restrictions on lump sum investment in its small-cap funds.

The company capped the investment amount to ₹2 lakh per PAN (first holder or guardian) per month for any lump sum investments, including additional investments or switch-ins. The company, however, did not touch the systematic investment plan (SIP) and systematic transfer plan (STP) registrations with a monthly limit of ₹25,000 per PAN for various frequencies. Several other AMCs, including SBI MF, Nippon India Life Asset Management, and Tata Mutual Fund, announced similar measures earlier.