Sebi Directs Mutual Funds to Safeguard Investors Amidst Market Froth
The capital markets regulator, Sebi, has issued a directive to mutual fund houses, urging them to establish a protective framework for investors in smallcap and midcap schemes. This move comes in response to a perceived buildup of froth in these market segments.
Background
Over recent quarters, there has been a significant influx of investments into small and midcap schemes of mutual funds. This surge in investment activity prompted Sebi to address concerns regarding the potential risks to investors.
Regulatory Measures
Sebi has recommended several steps to mitigate risks and protect investors’ interests:
| Regulatory Measures | Description |
|---|---|
| 1. Restrictions on Inflows | Consider imposing limitations on investments in smallcap and midcap schemes to manage excessive inflows. |
| 2. Portfolio Rebalancing | Encourage fund managers to rebalance portfolios to maintain stability and mitigate risks associated with concentrated investments. |
| 3. Guidelines for Investor Protection | Develop comprehensive guidelines to safeguard investors from potential disadvantages, such as the first-mover advantage of redeeming investors. |
Implementation
Sebi has instructed mutual fund trustees to collaborate with the Association of Mutual Funds in India (AMFI) to devise policies safeguarding investors’ interests. The regulator emphasizes the importance of proactive measures by Asset Management Companies (AMCs) and fund managers to protect investors.
The protective framework should extend beyond moderating inflows and portfolio rebalancing. It should also address concerns related to the first-mover advantage.
Furthermore, mutual fund houses are required to disclose the new policy on their websites within 21 days of implementation.
Market Trends
During the last quarter of 2023, the mid-cap category witnessed net inflows of Rs 6,468 crore, marking the 12th consecutive quarter of inflows. Similarly, the small-cap category experienced a record net inflow of Rs 12,052 crore, also marking the 11th consecutive quarter of positive inflows. These consistent inflows, coupled with favorable market conditions, have bolstered assets under management in these segments.