Leading to a sell-off in small, midcap, and microcap stocks on Wednesday, markets regulator Sebi has told mutual funds (MFs) to frame a policy to protect the interest of investors in small and midcap schemes.
In a letter to the Association of Mutual Funds in India (AMFI), Sebi said in the context of froth building up in 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 AMCs, shall ensure that a policy is put in place to protect the interest of all investors.
In the letter, Sebi said that AMCs should take appropriate and proactive measures to protect investors, including but not limited to moderating inflows, portfolio rebalancing, etc.
Steps should also be taken to ensure that investors are protected from the first mover advantage of redeeming investors, it said while directing that the policy should be approved and disclosed on each AMC’s website within the next 3 weeks.
The regulator’s directive, which was communicated to all MF houses, sparked selling pressure in the market with the Sensex falling over 800 points while Nifty also fell 1% to give its hold on the 22,000-level.
Indices related to smallcap, midcaps and microcaps fell over 2% as Sebi’s directive may reduce the pace of flow of funds in the broader market.
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In the last year, smaller stocks have led the upside on Dalal Street to make the market capitalisation of all BSE-listed stocks closer to the $5 trillion mark. Nifty Microcap 250 index has almost doubled in valued in the last 12 months. Nifty Smallcap 50 is up 77% and Nifty Midcap50 has rallied 62% during the period vs Nifty’s 26% gain.
Value investors have been warning against the froth building up in smaller stocks as retail investors are betting directly on smallcaps (without figuring out PE or PB levels) as well as through smallcap MFs.
“Retail investors’ ownership of the smallcap segment has also become sizeable, crossing even institutional ownership in many stocks. Institutional investors, like mutual funds, exercise broad controls and invest in a disciplined manner. However, momentum chasing by investors, coupled with limited free float available in the market, has created valuation distortions in a few cases. Such experience is further boosting investors’ confidence, over-shadowing the caution required,” Kotak Mutual Fund said.
The fund house had recently imposed a temporary limit to a subscription of units in its smallcap fund.
Analysts suggest keeping a moderate overweight stance on largecap stocks, equal weight on midcap stocks, and moderate underweight on smallcap stocks.
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