SEBI, the regulatory authority in India, is stepping up its oversight of small-cap funds. They’re now seeking information from individual asset management companies (AMCs) regarding the sale of these funds to super senior citizens. This move aims to ensure greater protection for elderly investors. The news was initially covered by Mint.
Investment advisors suggest that seniors, especially those aged 80 or older (super senior citizens), should avoid mid- and small-cap funds due to their tendency for short-term volatility. These funds are better suited for investors with longer timeframes, typically around seven years or more, as they can potentially generate significant returns over time.
An executive at a fund house mentioned that the capital market regulator has emailed individual AMCs where super senior citizens were found to have invested in small-cap schemes. This communication has been sent to several large AMCs as well.
“The regulator is asking AMCs to get confirmation from such investors that they are aware about high risks in such funds,” the person added.
SEBI has recently focused on small-cap funds due to concerns about excessive speculation in the mid- and small-cap segments of the stock market. To inform investors about the risks involved, SEBI instructed the Association of Mutual Funds in India (AMFI) to conduct stress tests and publish the results every 15 days on their websites and AMFI’s. The first round of these stress test results was announced on March 14-15, 2024.
According to the stress tests, if the stock market faced a severe collapse and investors rushed to redeem their investments, mid-cap funds would take around six days on average to sell off 50 percent of their portfolios. Small-cap funds would take about 14 days on average to do the same, as per the data.
From February 2022 to February 2024, small-cap funds received net inflows of Rs 65,512 crore, while mid-cap funds received Rs 45,562 crore. In contrast, large-cap funds saw inflows of only Rs 11,023 crore during this period. This discrepancy raises concerns about overheating in the small-cap segment.
Due to continuous inflows, the assets under management (AUM) of small-cap and mid-cap funds surged to Rs 2.49 lakh crore and Rs 2.96 lakh crore respectively, by February. Meanwhile, the AUM of large-cap funds reached Rs 3.06 trillion.
Small-cap stocks have recently experienced volatility, with many seeing significant declines. According to Value Research data, small-cap funds reported an average return of -4.56 percent in the last month, compared to a -0.07 percent decline in the large-cap fund category.