Small and midcap schemes may impose restrictions on redemptions, cap employee withdrawals, and increase the exit load, while ensuring a proportionate liquidation of the portfolio during market crises to safeguard the interests of all investors.
These measures have been outlined in the investor protection policies recently put out by mutual fund (MF) trustees.
The policies for small and midcap schemes were prepared by MF trustees following directives from the Securities and Exchange Board of India (Sebi) earlier this month.
Amid concerns of excessive froth, the regulator called for additional measures to protect investors in small and midcap schemes.
The policies released by the trustees focus on two aspects: Managing inflows by placing caps on investments and ensuring that all investors are protected during market crashes.
Some policies, such as those of Nippon India MF, DSP MF, and Quant MF, state that the fund house may impose restrictions on withdrawals according to Sebi norms, after approval from their board and trustees.
Other fund houses have implied the same, stating that they may take measures to manage outflows as per applicable norms.
While these measures have always been available to fund houses, this is the first time they have been codified for select schemes.
MF regulations allow restrictions on redemptions during circumstances leading to a systemic crisis or event that severely constricts market liquidity or the efficient functioning of markets.
In such a scenario, MFs can restrict redemptions for up to 10 working days.
However, they must allow withdrawals of up to Rs 2 lakh per day.
Other common measures among some policies include the introduction of higher exit loads and the capping of withdrawals by employee.
In case of extraordinary circumstances, the Unitholder’s Protection Committee, if deemed necessary, would subject withdrawals from Quant Small Cap & Quant Mid Cap schemes by employees, trustees, directors, management of AMC (asset management company) & group companies of AMC to compliance approval so that persons within the AMC are not able to take undue advantage at the cost of continuing investors, states the policy released by Quant MF.
Trustees have stated that the focus will be on ensuring that no investor gains an advantage over others during phases of market turmoil.
In case of 5 per cent or more net outflow on any particular day, the fund management team should adopt prudent liquidation of stock positions in the portfolio and ensure that the characteristic of the portfolio with respect to liquidity and quality should not be skewed or majorly affected post-redemption, states DSP MF s policy.
Other measures listed by trustees include broadening the investor base to manage investor concentration, improving liquidity management, and focusing on investor awareness.
According to DSP MF’s policy, the fund house will explore placing caps on single investor holdings and distributor concentration in the smallcap and midcap funds.
On the inflow side, some of the fund houses have already stopped accepting lump-sum money, while capping SIP investments.
The investor protection policy is in addition to additional disclosure by smallcap and midcap funds around portfolio liquidity.
The first set of disclosures showed that larger schemes may face difficulty if investors place requests for redemptions amounting to over 25 per cent of total assets under management.
Turbulent times
- Sebi on February 27 asks MF trustees to prepare policy for investor protection, mandates additional disclosures
- ICICI Prudential MF and Franklin Templeton MF join the likes of SBI, Tata, Kotak, and Nippon MFs to curb inflows
- Fund houses release the first set of stress test reports on March 15; they also release investor protection policy prepared by trustees
- Sebi action came after a nearly 80% rally in smallcap indices in the first 11 months of FY24
- In CY23, smallcap and midcap funds accounted for 40% (Rs 64,000 crore) of net inflows into active equity schemes
