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Fund houses operating sizeable smallcap funds have announced a fresh set of curbs this week to better manage liquidity risk and address concerns raised by the regulator.
Franklin Templeton Mutual Fund (MF) has become the latest fund house to limit the amount investors can put into its smallcap fund.
The fund house, managing nearly Rs 12,000 crore in its Franklin India Smaller Companies Fund, has capped one-time investments at Rs 200,000 per month.
Investors opting for the systematic investment plan (SIP) route can invest a maximum of Rs 50,000 per month.
Nippon India MF, which already imposed restrictions, has further tightened the investment limit.
The fund house has reduced the daily SIP investment limit to Rs 50,000 from Rs 500,000.
This fund house, managing the largest smallcap scheme, first placed restrictions in July 2023 and has not been accepting lump-sum inflows since then.
“The limit on subscription of units has been proposed to facilitate gradual deployment of the corpus to align with the nature of smallcap investing. This step is warranted considering the recent sharp rally in the smallcap space and increased investor participation through high-ticket investments, which would be in the best interest of existing unit holders and appropriate for incremental investments,” the fund house said while announcing the change in investment limit.
Additionally, Nippon MF and Motilal Oswal MF have revised the exit load applicable to their smallcap funds. Investors will now incur a 1 per cent penalty if they withdraw within one year of investment, as opposed to the previous month-long period.
Motilal Oswal MF has also extended the revised exit load to its midcap scheme.
Apart from Franklin Templeton and Nippon India, four other fund houses — SBI, ICICI Prudential, Kotak, and Tata — have restricted flows into their smallcap funds.
These measures come a week after fund houses released stress test reports of their smallcap and midcap funds, along with an investor protection framework.
Smallcap and midcap schemes have been under scrutiny ever since the Securities and Exchange Board of India (Sebi) highlighted the accumulation of ‘froth’ in these spaces.
The regulator has instructed MFs to address two fronts: informing investors of the risks involved (through the disclosure of stress test outcomes) and mitigating any identified risks.
Suggested measures include restricting inflows, portfolio rebalancing, and creating a framework to protect investors from the first-mover advantage of redeeming investors.
In their investment protection framework, MFs said they will manage risks by focusing on better liquidity management, ensuring lower investor concentration, and enhancing disclosures.
