The recent advisory from the Association of Mutual Funds in India (AMFI) has called upon asset management companies (AMCs) to implement a policy aimed at safeguarding investors specifically in the small and midcap segments.
In response to the advisory issued by the Association of Mutual Funds in India (AMFI), asset management companies (AMCs) are urged to devise a protective policy tailored to shield investors with holdings in small and midcap segments.
On Wednesday, midcap and small-cap shares experienced a significant downturn, with their respective indices plummeting by approximately 2%. According to reports by Moneycontrol, one of the contributing factors to this decline was an advisory issued by the Association of Mutual Funds in India (AMFI). The advisory urged asset management companies (AMCs) to establish a policy aimed at safeguarding investors in the small and midcap segments, citing concerns over “froth building up in the broader markets.”
“The advisory stated, ‘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.’ This directive followed Securities and Exchange Board of India (Sebi), the capital markets regulator, raising concerns about ongoing inflows into investment schemes in the small and midcap category.”
AMFI has recommended several steps to address the concerns in the small and midcap segments. One key recommendation is for mutual funds (MFs) to moderate inflows into these schemes, alongside rebalancing the portfolio. Moreover, measures are proposed to protect investors from the first-mover advantage of the redeeming members.
The market was “rattled” by these recommendations because moderating inflows could potentially result in restrictions on fresh capital entering the mid and small-cap schemes. Moneycontrol noted that it was the continuous influx of funds that had been driving stock prices higher, implying that any limitations on these inflows might disrupt the upward momentum in the market.
Stock prices tend to rise when more investors allocate funds into specific schemes. This increased demand drives up prices, consequently attracting even more investors. This creates a “self-fulfilling” effect, as mutual funds have more capital available to invest in the market. As mutual funds purchase stocks, the prices of those stocks increase, which in turn raises the net asset value of the scheme. This heightened valuation attracts additional inflows, leading to further purchases and subsequently even higher prices. This cycle continues as long as the influx of funds persists, contributing to the upward trajectory of stock prices.
To ensure that investors who redeem their investments first do not put those remaining at a disadvantage, it is essential for the mutual fund scheme to maintain a sufficient level of liquidity. This liquidity enables the fund to fulfill potential redemption requests without needing to sell shares at unfavorable rates. By having adequate liquidity on hand, the fund can meet redemption demands efficiently, minimizing the impact on the remaining investors’ returns.
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