Mutual fund restrictions remain even as small-cap funds see revival

Topics Mutual Funds | small-caps

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Popular small-cap funds continue to restrict investor flows even as this section of the market is witnessing a revival. So far this calendar year, the Nifty Smallcap 100 index has outperformed the benchmark Nifty by 6 percentage points.


Axis Mutual Fund (MF) has introduced limits on accepting investor flows into its small-cap fund. According to a notification by the fund house, fresh subscriptions would be accepted only for an amount up to Rs 2 crore per investor in a day. This would also apply to switch-ins and additional subscriptions, besides instalments through systematic investment plans (SIPs) and systematic transfer plans (STPs). The scheme manages assets of Rs 2,107 crore, shows data from the Association of Mutual Funds in India.


For SBI Small Cap Fund and DSP Small Cap Fund, lump sum investments remain suspended. Investors typically use this route for tactical investments into small-caps.


Some limits have been relaxed during the broader market correction in 2018, with two schemes allowing subscription through the SIP route. But, SBI Small Cap Fund has continued with a cap of Rs 25,000 for SIPs. The fund has assets of Rs 3,519 crore, while DSP Small Cap Fund manages assets of Rs 5,239 crore. Similarly, the Rs 9,000-crore Nippon India Small Cap Fund has barred lump sum investments, while limiting fresh subscriptions through SIPs and STPs to Rs 500,000 of monthly instalments.


Industry analysts say, while the small-cap space is showing signs of revival, deploying large sums could still be challenging, given the lower liquidity level in this segment. “It is not always easy to find good enough ideas with lower analyst coverage in this space. This, combined with lower liquidity in such stocks, makes it difficult to deploy large flows,” said Kaustubh Belapurkar, director (fund research), Morningstar Investment Advisors India. “Further, there could be concentration risks if funds are deployed in same ideas and higher impact costs on account of limited liquidity,” he added.


Over a three-year period, mid- and small-cap funds have underperformed their larger peers, but have done well over longer periods.


Experts say small-caps are not suitable for first-time investors, given these are susceptible to large draw-downs and high volatility. “Investors with horizon of 6-7 years may opt for these funds,” said a fund manager. Over 5-year and 10-year periods, performance of small-caps has been higher than large-caps by 50-200 basis points.


“We looked at the small-cap index data since its inception in September 2005, and found that when the one-year trailing return was negative, the following one-year (compounded annually) return was around 13 per cent. Small-caps were down 24 per cent in 2018 and 8 per cent in 2019. Therefore, the opportunity seems right for considering small-cap investments,” said Anoop Bhaskar, head (equity), IDFC Mutual Fund (MF).

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