The Association of Mutual Funds in India (AMFI), an industry body for asset managers, has asked members to moderate inflows into small and mid-cap funds and protect investors from large outflows, after strong inflows raised concerns of a potential crash.
AMFI made the request in a letter dated February 27, not previously disclosed. India's small and mid-cap funds have seen high inflows, causing concern among authorities about how they would hold up in the event of a sharp market selloff.
The communication came after Sebi asked fund houses to provide more information about risks associated with such funds, Reuters reported.
AMFI has reportedly directed fund houses to submit the stress test results once every 15 days, the first by March 15.
The funds are being asked to disclose how long it might take to accommodate large redemptions, what impact large outflows could have on the value of the portfolio and how much cash and liquid assets the fund holds to meet outflows. "Investment committees were always aware of liquidity challenges but investors were not. Once this information is available to them, they can compare each fund," said Harsha Upadhyaya, chief investment officer at Kotak Mutual Fund.
Mutual funds tend to keep between 1% and 5% of their assets as cash as a prudent measure to meet outflows, according to public documents. There is, however, no minimum regulatory requirement.
Funds need to invest at least 65% of their assets in small-cap stocks to be categorised as a small-cap fund and the remaining 35% can either be in cash or invested in large-cap stocks. The rule is similar for mid-cap funds.
The checks have already started. AMCs such as SBI, Tata and Nippon have reportedly stopped accepting lumpsum investments in their smallcap schemes while Kotak will start imposing a cap on the amount you can invest. Kotak from March 4 will restrict fresh subscriptions via lumpsums for each investor to Rs 2 lakh per month while SIPs will be limited to Rs 25,000 per month in the smallcap fund.