“Few stocks in the small- and mid-cap segment have multiplied, and strong momentum is taking them beyond the fair value of businesses,” said Kotak in a letter to investors. “We believe our funds are positioned defensively, emphasising the quality of businesses. However, given the market background, we see it prudent to limit the inflows in our Small Cap Fund at this juncture.”
Kotak Mutual said it will review this decision in the second quarter (April-June) of this calendar year if more investing opportunities arise or valuations become more palatable.
In the last three months, the S&P BSE Small Cap TRI (Total Returns Index) rose 16.21%, while over the last year, it rose 64.54%. In the same period, the Nifty rose 12.35% and 28.27%, respectively.
Managed by Harish Bihani, Kotak Small Cap, which manages assets worth ₹14,426 crore, has returned 39.33% in the past year, as against its benchmark, S&P BSE 250 Small Cap TRI’s gains of 65.54%.
“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, Money Mantra.In 2023, Nippon India and Tata Mutual put some restrictions on investments in their small-cap schemes. In the period between February 2023 and January 2024, small-cap funds have seen net inflows of Rs 42,037 crore– the highest amongst all categories of equity mutual fund schemes. This accounted for 25% of the equity MF inflows of ₹1.71 lakh crore.
Kotak Mutual said the small caps’ market capitalisation to the country’s overall market capitalisation has climbed to 18.9% after the run-up in share prices as against the historical level of 10%.
“Retail investors’ ownership of the small-cap segment has also become sizeable, crossing even institutional ownership in many stocks,” said the fund house. “Institutional investors, like mutual funds, exercise broad controls and invest in a disciplined manner. However, momentum chasing by investors, coupled with limited free float available in the market, has created valuation distortions in a few cases. Such experience is further boosting investors’ confidence, over-shadowing the caution required.”
