Kotak Mahindra MF restricts inflows in Kotak Small-Cap Fund

27 Feb 2024 , 01:20 PM

Beginning on March 4, Kotak Mutual Fund will limit investments into its small-cap scheme, following the likes of Nippon and Tata in doing so. This is because high share valuations have made it difficult for fund managers to manage constant inflows. The fund firm said in a notification that each investor’s monthly contribution through lumpsums will be limited to ₹2 lakh. The maximum amount that any investor may put in this product each month through systematic investment plans (SIPs) will be ₹25,000.

In a letter to investors, Kotak stated, ‘Very few small- and mid-cap stocks have multiplied, and strong momentum is taking them beyond the fair value of businesses.’ ‘We think our investments are defensively positioned, focusing on the calibre of companies. But in light of the current state of the market, we believe it is wise to restrict inflows into our Small Cap Fund at this time.’

Kotak Mutual stated that if further investment opportunities present themselves or prices improve, it will reevaluate this choice in the second quarter (April–June) of this year.
The S&P BSE Small Cap TRI (Total Returns Index) increased 16.21% during the last three months and 64.54% over the previous year. Nifty increased by 12.35% and 28.27% throughout that same time frame.

Under the management of Harish Bihani, Kotak Small Cap has returned 39.33% over the last year compared to the 65.54% returns of its benchmark, the S&P BSE 250 Small Cap TRI. The fund has assets of ₹14,426 Crore. 

‘The sharp run-up and high flows in the small-cap space led to the fund house taking this decision as they expect volatility and do not want large lumpy flows given that valuations are high and elections are nearby,’ said Viral Bhatt, founder of Money Mantra.

Nippon India and Tata Mutual implemented certain limitations on investments made in their small-cap programs in 2023. 

Small-cap funds saw net inflows of ₹42,037 Crore between February 2023 and January 2024, the most of any category of equity mutual fund schemes. This represented 25% of the ₹1.71 lakh Crore equities mutual fund inflows.

According to Kotak Mutual, following the surge in share prices, the small caps’ market capitalization as a percentage of the nation’s total market capitalization has increased to 18.9% from the previous level of 10%.

‘Retail investors’ ownership of the small-cap segment has also become sizeable, crossing even institutional ownership in many stocks,’ stated the investment firm. ‘Institutional investors practice disciplined investing and extensive controls, much like mutual funds. However, investors’ tendency to chase momentum combined with the market’s limited supply of free float has occasionally led to value distortions. Investor confidence is being further bolstered by this experience, overshadowing the need for caution.’

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