Kotak Small Cap Fund Restricts New Fund Subscriptions, Is It Due To Higher Valuation In Small-Caps?

Kotak Small Cap Fund has restricted subscriptions from March 4, 2024 to safeguard investor interest amid a surge in small-cap stock valuations. Read on to know more
Kotak, stock
Kotak, stock

Kotak Mahindra Asset Management Company (AMC) has announced a temporary limit on the subscription of units in Kotak Small Cap Fund, effective from March 4, 2024, until further notice. The move is aimed at safeguarding the interests of current unitholders and to ensure that incremental investments are made appropriately due to the recent significant surge in small-caps, the AMC said.

Details Of Restrictions

Fresh lump sum investments (including additional investments/switch-ins) will be restricted to Rs. 2 lakh per Permanent Account Number (PAN) per month. Fresh registrations for systematic investment plans (SIPs) or systematic transfer plans (STPs) will continue, but will be restricted up to Rs. 25,000 per PAN per month for daily, weekly, monthly, and quarterly frequencies. The daily limit is Rs. 1,250, weekly limit is Rs.6,250 and quarterly limit is Rs 75,000, the AMC said. There will be, however, be no limit on the number of applications for SIP/STP registrations, though the total investment amount per PAN can only be up to to Rs. 25,000.

Further, special products, such as SIP Top Up facility, Flex SIP, Smart Systematic Investment Plan, Smart Systematic Transfer-In Plan, and Transfer-In of Income Distribution cum Capital Withdrawal Plan (IDCW) will not be available for SIPs and/or STPs registered in the scheme. Any transaction which will result in the breach of the above restriction will be completely rejected, the AMC said.

Existing SIPs or STPs registered prior to March 4, 2024 will, however, not be impacted by these restrictions, and unitholders under the Dividend Reinvestment Option will also be free from the impact. However, fresh SIP registrations will not be available under semi-annual and annual frequency in the scheme.

Overvaluation In Small Cap Stocks?

The S&P BSE SmallCap index has surged by over 60 per cent in one year, compared to the broader BSE Sensex, which saw around 18 per cent increase.

This huge returns led to small-cap mutual funds seeing inflows of Rs 41,035 crore in 2023, double the previous year’s inflow. Some small-cap funds have given 60-70 per cent returns in the last one year, which has led to a risk of some small-cap stocks getting overvalued, thus leading to a correction.

The Securities and Exchange Board of India (Sebi) had at the end of January 2024 asked small-cap mutual funds to do an internal stress test to see if they could withstand the potential sharp market falls or sudden outflows. Now, Kotak AMC has also signalled that incremental investments should be made appropriately due to recent significant surge in the small-cap space.

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