AMFI asks mutual funds to limit flows in mid and small cap funds

The Association of Mutual Funds in India (AMFI) an industry body for asset managers, on Tuesday asked members to moderate inflows into small and mid-cap funds and protect investors from large outflows, after strong inflows raised concerns of a potential crash.

AMFI made the request in a letter dated February 27, which has not been previously disclosed. It came following a communication from India's market regulator Securities and Exchange Board of India (SEBI) which has also asked fund houses to provide more information about risks associated with such funds, Reuters reported on Tuesday. The fund houses have 21 days to comply.

SEBI did not immediately respond to a request for comment.

India's small and mid-cap funds have seen high inflows, causing concern among authorities about how they would hold up in the event of a sharp market selloff.

The Nifty small cap 250 index has surged 66.72 per cent over the past 52 weeks and the Nifty mid cap 100 index is up 59.34 per cent. That far exceeds the benchmark Nifty's 26.69 per cent rise.

The advisory could require funds to stop redemptions in a scenario of sudden outflows or make their portfolio more liquid, by raising the amount of cash or large cap stocks, said two officials at asset management firms.

They declined to be identified as they are not authorised to speak to the media.

Stopping redemptions is an extreme scenario and involves a long process which needs approvals, said the first fund house official.

"To make the fund more liquid some asset managers will need to sell their current small and mid-cap holdings," said the second fund house official.

Mutual funds keep between 1 per cent and 5 per cent of their assets as cash to meet outflows but there is no minimum regulatory requirement.

Funds need to invest at least 65 per cent of their assets in small-cap stocks to be categorised as a small-cap fund and the remaining 35 per cent can either be in cash or invested in large-cap stocks. The rule is similar for mid-cap funds.