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Markets ‘spooked’ by mutual fund body AMFI's advisory to protect investors. Here's why
The advisory asked asked asset management companies (AMCs) to bring in a policy to protect investors in small and midcap segments.
A day ago, on Wednesday, midcap and small-cap shares took a beating, with the respective indices diving around 2%. One of the reasons attributed for this, as per Moneycontrol, was an advisory from Association of Mutual Funds in India (AMFI), in which the mutual fund body asked asset management companies (AMCs) to bring in a policy to protect investors in small and midcap segments ‘in light of the froth building up in the broader markets.’
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“Trustees, in consultation with Unitholder Protection Committees of the AMCs, shall ensure that a policy is put in place to protect the interest of all investors,” the advisory read. It came after Securities and Exchange Board of India (Sebi), the capital markets regulator, highlighted continuing flows to investing schemes in the small and midcap category.
What steps AMFI has recommended?
It recommended that, among other things, mutual funds (MFs) should moderate inflows into these schemes, in addition to rebalancing the portfolio. Additionally, investors must be protected from the first-mover advantage of the redeeming members.
Why was the market ‘rattled’ by this?
This is because moderating inflows could lead to restrictions on fresh money coming into the mid and small-cap schemes, Moneycontrol said, adding that in some ways, it was this continuous flow of funds that was pushing stock prices higher.
How stock prices get pushed higher?
When more people put money in these schemes, prices move up, in turn attracting more investors. This leads to a ‘self-fulfilling’ effect, as mutual funds have money to deploy in the market. When stocks are purchased, the stock prices go up, resulting in an increase in the scheme's net asset value. This further attract more inflows, leading to increased purchases and even higher prices.
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The same cycle, however, can work in reverse as well.
How to ensure that investors who redeem first, put those staying back at a disadvantage?
This can be done by maintaining a certain level of liquidity in the scheme. Doing so will help the fund meet potential redemption requests with the need to sell shares at unfavourable rates.
