Why has Nippon Life India AMC stopped lump-sum inflows into its small cap fund?

What is Nippon India Small Cap Fund?

Nippon India Small Cap Fund primarily invests in small-cap space. It focuses on the smaller capitalization (below top 250 companies in terms of market capitalization) in the long term. Small-cap companies are potential mid-caps of tomorrow and offer the advantage of high growth prospects over the long term, as per the details of the fund on the AMC’s website.

This fund was launched in 2010 and belongs to a ‘very high’ risk category. It is suitable for investors with a horizon of at least 5-7 years and have an appetite for volatility.

What has Nippon India Mutual Fund said?

“Investors are requested to note that Nippon India Mutual Fund has decided to limit the subscription of units in Nippon India Small Cap Fund (the Scheme), with effect to July 7, 2023,” the fund house said in a notice put up on its website.

Any fresh or additional subscriptions or switch-ins in the fund will not be allowed or accepted at any point of time till further notice, from today, it said.

This means that an investor cannot make a lump-sum investment in the fund.

Mutual fund companies issue ‘units’ to investors against the amount invested at the prevailing NAV (net asset value). NAV denotes the performance of a particular scheme of a mutual fund.

So, why has the fund house decided to limit the subscription?

“The limit on the subscription of units of the small-cap fund is being proposed to facilitate gradual deployment of the corpus in order to align with the nature of small-cap investing,” the asset management company (AMC) said.

The step is warranted considering the recent sharp rally in the small-cap space and increased investor participation through high-ticket investments, which would be in the best interest of existing unit holders and appropriate for incremental investments, it said.

So, has the subscription in the fund stopped entirely?

The fund house said the fresh registrations through SIP without initial investment or STP or other special product would continue with a limit of Rs 5 lakh per day per PAN (permanent account number).

The investment restrictions will not be applicable for investments mandated as per regulatory requirements, i.e., Alignment of interest of Designated Employees of AMCs with the Unitholders of the Mutual Fund Schemes & mandatory contribution by AMC in its schemes.

To align the interest of the key employees of the AMCs with the unitholders of the mutual fund schemes, the capital markets regulator SEBI has said that a part of the compensation of the key employees of the AMCs needs to be paid in the form of units of the schemes in which they have a role.

What about the existing SIP or STP?

The AMC said the restriction would not affect SIP or STP or other special product, registered before the effective date (July 7) and the unitholders under Dividend Reinvestment Option. Under a dividend reinvestment plan, the dividend declared by a mutual fund is reinvested into the scheme to purchase more units.