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SEBI Urges Mutual Fund Houses to Safeguard Investors in Small and Midcap Schemes Amid Surging Inflows

The Securities and Exchange Board of India (SEBI), the capital markets regulator, has directed mutual fund houses to establish a framework to safeguard investors who have invested in smallcap and midcap schemes, citing concerns about a “froth building up” in these categories.

SEBI has recommended several measures to address this issue, including imposing restrictions on inflows into these segments, rebalancing portfolios, and implementing guidelines to protect investors from the first-mover advantage of redeeming investors.

The regulator’s communication to the Association of Mutual Funds in India (AMFI) on Tuesday urged mutual fund trustees to collaborate with unitholder protection committees to formulate policies safeguarding the interests of investors in smallcap and midcap schemes.

“In the context of the froth building up in the small and mid-cap segments of the market and the continuing flows in the small and mid-cap schemes of mutual funds, trustees, in consultation with unitholder protection committees of the AMCs shall ensure that a policy is put in place to protect the interest of all investors,” SEBI stated.

SEBI emphasized that Asset Management Companies (AMCs) and fund managers should take appropriate and proactive measures to protect investors, and the framework should not be limited to moderating inflows and portfolio rebalancing.

Furthermore, the new framework should mitigate the first-mover advantage of redeeming investors, SEBI noted.

Fund houses are required to disclose the new policy on their websites within 21 days, according to the communication.

During the three months ended December 2023, the mid-cap category witnessed net inflows of ₹6,468 crore, marking the 12th consecutive quarter of inflows. Additionally, the small-cap category recorded a net inflow of ₹12,052 crore in the third quarter of fiscal 2023-24, the highest ever for the category in a quarter, and the 11th consecutive quarter of net inflows. Strong and consistent net inflows, coupled with favorable market conditions, boosted the assets under management for these segments.