In a counter-intuitive move that could also mean a lack of confidence in the dizzying post-election rally, fund houses are trying to regulate or even stop inflows into some of their funds, especially those investing in smaller stocks. While some fund houses have been doing it informally through instructions to advisors,
DSP BlackRock recently issued an addendum saying it will not accept new systematic investment plans (SIPs) or lump-sum investments in excess of Rs 2 lakh into its micro-cap fund from October 1.
The fund house says it is doing this to protect the interests of existing investors.
The move comes at a time when several fund houses are trying to raise funds from the market through new fund offers (NFOs). "DSP BlackRock Trustee Company Private Limited ('Trustees'), the Trustee to DSP BlackRock Mutual Fund, has vide resolution dated September 22, 2014, decided to temporarily suspend the below-mentioned transactions in DSP BlackRock Micro Cap Fund - an open-ended diversified equity growth scheme - with effect from October 1, 2014," the fund house said in the addendum dated September 25.
It said it was taking the step because there was a possibility that further large inflows into the scheme might prove detrimental to the interest of the existing unit holders.
"The transactions suspended are subscription/switch-in application(s) in the scheme amounting to more than Rs 2 lakh, registration of new SIP in the scheme of single instalment amounting to more than Rs 2 lakh and registration of new systematic transfer plan into the scheme of single instalment amounting to more than Rs 2 lakh," it added.
The fund house also warned investors from circumventing the rule by using multiple applications. "DSP BlackRock Investment Managers Private Limited reserves the right to reject or compulsorily redeem units without any prior notice to the investor at applicable NAV (net asset value), in case of multiple applications/transactions by the investor(s) amounting to more than Rs 2 lakh."
The suspension will continue till further notice, the fund house said. Surjit Mishra, national head (mutual funds) at Bajaj Capital, a New Delhi-based distributor, said most fund houses were trying to control flows into the small-cap funds.
"In the micro- and small-cap space, the ideas are not too many. Quality ideas are not too many. There is a possibility of returns not matching up to the past and could be even negative."
He added while the popular way for funds to restrict investments is by cutting down ticket size, some funds are also restricting the frequency of investments.
Small- and mid-cap funds have been among the top performers for fund houses during this rally and, hence, have caught investor imagination.
Fund houses are caught in a tricky situation because rules do not allow them to hold on to cash for long.
In a market that has run-up heavily they are also not very sure that the market would not reverse its gains. In case of a reversal, the pain will be most acute in the sparsely traded small stocks.
Ramesh Bhat, a Chennai-based advisor and president of IFA Galaxy, said: "The small-cap shares have already run up heavily. People have a tendency to look at one-year returns.
In the past year, small-cap funds have given between 90 and 120 per cent. People are getting greedy."
Trend reversal
Net asset values of small- and mid-cap funds have shot up considerably Investors tend to choose funds based on past returns
But fund managers are not sure of future performance of these small stocks
Because of thin volumes, possibility of a crash is high So funds are restricting inflows More funds may follow suit
