March 11 witnessed heightened pressure on smallcap stocks as names like BCL Industries, JK Tyre, Tata Chemicals, JM Financial, and IIFL Finance saw significant declines of up to 17 percent on the BSE, reflecting concerns over potentially stricter SEBI regulations. Concurrently, the BSE Smallcap index experienced a notable decline of up to 1.6 percent.
In terms of year-to-date performance, the BSE Smallcap index has only managed to notch a modest 2 percent gain, trailing behind the robust 8 percent surge seen in the BSE Midcap index. Meanwhile, the benchmark Sensex has seen a more subdued rise of 0.9 percent over the same period.
The Securities and Exchange Board of India (SEBI) has directed mutual funds (MFs) to safeguard investors against potential ‘froth’ in the mid and small-cap segments. This move aims to ensure adequate liquidity in the event of a market downturn and sudden outflows from these funds.
Subsequently, the Association of Mutual Funds in India (AMFI) has instructed fund houses to conduct stress tests on their mid and small-cap schemes using data from the previous month. These findings are to be disclosed before March 15 to enhance transparency and investor protection.
AMFI Urges Fund Houses and Managers to Safeguard Investors Through Proactive Measures. The Association of Mutual Funds in India (AMFI) has called upon fund houses and managers to adopt proactive strategies aimed at protecting investors. This includes measures such as moderating inflows and conducting portfolio rebalancing to mitigate risks effectively.
According to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, additional regulatory measures are likely as SEBI aims to curb bubble formation and its potential impact on the broader market.
“Despite certain mutual funds attempting to limit inflows by halting lump sum investments in smallcap schemes, the overvalued small-cap segment continues to attract funds,” Vijayakumar noted. He highlighted SEBI’s recent call for stress tests in mid and small-cap schemes as a regulatory response to this ongoing challenge.
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