Are restrictions being put on your small and midcap SIP Investment by SEBI?

In response to the growing concern over froth building up in the mid and small-cap space, the Securities and Exchange Board of India (SEBI) has taken proactive measures to protect investors’ interests. With a surge in inflows into small-cap schemes and escalating stock valuations, SEBI has urged fund houses to develop policies within the next 21 days to mitigate potential risks. Here’s a breakdown of the suggested steps and what investors should be mindful of.

SEBI’s Recommendations

• Moderate Inflows: SEBI has advised fund houses to limit inflows into their schemes. This could involve capping investments through SIP or lumpsum or even halting fresh inflows altogether. Various fund houses have previously implemented similar measures to manage inflow pressures, such as SBI Small Cap and Mirae Asset Emerging Bluechip.
• Rebalance Portfolios: To alleviate redemption pressures, SEBI has encouraged fund houses to rebalance their portfolios. This may include increasing exposure to large-cap stocks and maintaining higher cash reserves to meet redemption demands.
• Protect Investors from Early Redemptions: SEBI aims to prevent adverse effects on investors caused by mass redemptions during market downturns. Fund houses may limit the frequency or amount of withdrawals within specific periods to avoid sudden rushes to withdraw funds.

What investors can do?

You can look at 3 parameters to understand how your fund is managing risk

1. Cash Holding: Observing the proportion of cash holdings in fund portfolios is crucial. Higher cash reserves can serve as a buffer during periods of heavy redemptions or market corrections. Among small-cap funds, a range of cash holdings exists, with some holding 10% or more, while others maintain lower levels.
2. Large Cap Allocation: Assessing the allocation to large-cap stocks provides insights into a fund’s liquidity. Funds with a higher allocation to large caps may benefit from increased liquidity, as these stocks are typically more actively traded.
3. Size and Diversification: The size of a fund can impact its liquidity and ability to manage investments effectively. Large-sized funds may face challenges in executing trades without significantly impacting stock prices. Diversification is key to managing these risks, with some funds holding extensive portfolios to spread investments across multiple assets.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.