Do this to survive the froth building up in small-cap, mid-cap mutual fund schemes
funds’. The market regulator asked for a policy to be put in place to protect investors. The letter laid down two requirements for this policy. First, ‘appropriate and proactive measures are to be taken by AMCs and fund managers to protect investors, including, but not limited to, moderating inflows, portfolio rebalancing, etc.’ Second, it asked for ‘steps to ensure that investors are protected from the first-mover advantage of redeeming investors’.
The specific threats that Sebi is pointing at and the measures to contain these are quite clear. The regulator is worried that if large inflows in small-cap funds continue, the quality and value of the portfolio holdings will inevitably drop. There is only so much worthwhile investable stock available in the smaller companies.
The second concern is about what will happen if a small- and mid-cap crash does occur. The investors who exit as soon as a downturn begins can disproportionately benefit at the expense of those who remain, as their redemptions are likely to force fund managers to sell better quality holdings at unfavourable prices. This will compromise the fund’s quality and value for remaining investors. This is not a hypothetical situation; we have repeatedly seen it happen in debt funds.
This scenario can create a vicious cycle, worsening the impact of a market crash for investors who are not the first to redeem. Consequently, Sebi’s language points at mitigating this first-mover advantage and aims to ensure a more equitable distribution of risk and loss
