Small, Mid-cap mutual funds in focus as MF stress test looms large

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Days after SEBI CEO Madhabi Puri Buch cautioned against the imminent “froth” and dangerously high valuation currently engulfing present in the small and mid-cap mutual funds, ICICI Prudential MF has stopped accepting lumpsum investments in its small and mid-cap schemes, effective immediately. However, investments via SIPs or STPs will continue, with a ceiling of Rs 2,00,000 per PAN card per month.

In response, bloodbath ensued in the market, with the BSE SmallCap Index dipped by 5.11%, along with BSE Midcap Index, which slumped by 4.20%. Investors collectively lost around Rs 13 lakh crore in the markets today. As AMFI data indicates, small-cap and mid-cap mutual funds have been at the receiving end of many enthused investors who have continued to pump money in the highly risky, albeit high-return promising schemes in the small and mid-cap space. 

As per AMFI data, in January, small-cap funds saw inflows worth Rs 3,256.98 crores. On the other hand, inflows in mid-cap funds stood at Rs 2,061.18 crores, whilst large-cap funds saw inflows worth Rs 1,287.05 crores. However, during February 2024, small-cap funds saw inflows worth Rs 2,922 crores, while mid-cap funds inflows remained largely steady at Rs 1,808.18 crores. In contrast, large-cap funds only saw inflows worth Rs 941 crores in this period.

The momentum carries over from the last calendar year, which explains why the small and mid-cap segment market is currently overheated. Between October-December 2023, small-cap funds received a total of Rs 12,051.87 crores, while relatively established, less-risky large cap funds only saw inflows worth Rs 749.57 crores.

However, Uday Kotak, chairperson of Kotak Securities, notes that the situation is nowhere near the bubble-like situation Buch was pointing at. Other market experts, too, highlight that there are currently no visible signs of rushed redemptions Notably, a far clearer picture would emerge the day after, given that mutual funds houses will have to publish reports of their stress tests. In essence, this test would highlight their liquidity, or the ability of small and mid-cap funds to meet any instantaneous redemption requests, should there be an investor rush for funds.