Kotak Mutual Fund latest to place restrictions on smallcap funds

Kotak Mutual Fund has joined some of its peers in placing restrictions on the amount investors can park into its Rs 14,500 crore smallcap fund, citing a sharp run in stock prices, upcoming elections across the globe, and limited supply of new smallcap firms in the listed space.

In a letter to investors dated February 26, the fund house announced that investors can now put a maximum of Rs 200,000 as lumpsum each month and Rs 25,000 per month through the systematic investment plan (SIP) route.

“Retail investors’ ownership of the smallcap segment has 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,” it said.

It highlighted that the Nifty Smallcap 250 Total Return Index (TRI) index is up nearly 66 per cent in the last year.

“Few stocks in the small and midcap segment have multiplied, and strong momentum is taking them beyond the fair value of businesses. While India’s market capitalisation/GDP is hovering at a lifetime high of Rs 130 per cent, small caps’ market capitalisation to overall market capitalisation has climbed to Rs 18.9 per cent. Historically, the proportion has been Rs 10 per cent,” it added.

Last year, Tata Mutual Fund and Nippon India Mutual Fund also placed similar restrictions amid growing investor interest in smallcap funds. With the smallcap funds remaining the top performers across time-frames, they have been attracting the highest flows among equity-oriented schemes for over a year now. In the calendar year (CY) 2023, smallcap schemes raked in nearly Rs 40,000 crore, while the largecap and flexicap schemes garnered only Rs 4,500 crore.

Analysts and fund managers have been advising caution in the smallcap space, citing valuation concerns post the sharp run-up. The Nifty Smallcap 100 index currently has a price-to-earnings multiple of 21.7, significantly higher than the 5-year average of 17.1, shows Bloomberg data.

Kotak Mutual Fund said the decision will be reviewed in the second quarter of CY 2024 “depending on better clarity emerging on some of these uncertainties or as more opportunities arise with the progression of the economy or valuations becoming more palatable”.

“Investors can consider taking equity exposure through largecap funds or hybrid funds like Aggressive Hybrid category/asset allocation funds. Given the strong macro development for India with government policies and fiscal prudence, largecap or hybrid funds can help generate a better risk-reward profile. A moderate overweight stance on largecap stocks, equal weight on midcap stocks and moderate underweight on smallcap stocks,” it said.

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