SEBI for risk management: The market regulator Securities and Exchange Board of India (SEBI) has instructed asset managers in the country to provide investors with more comprehensive information regarding the risks associated with their small and mid-cap funds, according to sources familiar with the matter.

Amid high inflows into small and mid-sized funds, concerns have arisen amongst authorities about their resilience in the face of potential market downturns. The Securities & Exchange Board of India (SEBI) has been scrutinising stress tests conducted by such funds and is now urging them to disclose crucial details.

Asset managers are being requested to divulge information on the potential timeline to accommodate large redemptions, the possible impact of major outflows on portfolio value, and the amount of cash and liquid assets available to meet withdrawal demands.

Harsha Upadhyaya, chief investment officer at Kotak Mutual Fund, underlined the importance of investors having access to such information to enable informed comparisons between different funds. The Association of Mutual Funds in India (AMFI), collaborating with SEBI, is proposing a standardised format for risk disclosure.

While SEBI and AMFI have yet to officially comment on the matter, sources indicate that funds are expected to commence making these disclosures in April. Mutual funds typically maintain a cash reserve of 1 per cent to 5 per cent of their assets to address outflows, although there is no specific regulatory requirement in this regard.

Heavy inflows have sent the Nifty small cap 250 index NISM250 surging 71 per cent over the past 52 weeks and lifted the Nifty mid-cap 100 index NIFMDCP100 64 per cent. That far exceeds the benchmark Nifty's NSEI 28 per cent rise.

To qualify as small-cap funds, funds must allocate at least 65 per cent of their assets to small-cap stocks, while the remaining 35 per cent can be invested in large-cap stocks. Similar rules apply to mid-cap funds.

Some concerns have been raised regarding the adequacy of cash reserves in certain funds, with some fully invested in small/mid-cap stocks without prudent investments in large-cap stocks.

In response to heightened inflows, Kotak Mutual Fund has imposed temporary restrictions on inflows into its small-cap fund, citing concerns about "momentum chasing" overshadowing necessary caution. Last year, Tata Mutual Fund and Nippon India Mutual Fund halted lump sum investments in their small-cap funds.

(With Reuters inputs)