AMFI Issues New Risk Disclosure Guidelines for Mid Cap and Small Cap Funds

The Association of Mutual Funds in India (AMFI), has issued a detailed advisory for the disclosure of risk parameters for Mid Cap and Small Cap equity schemes. This move aligns with increasing regulatory emphasis on investor protection and enhanced transparency within the mutual fund industry.

Mid and small cap funds invest in companies that have a smaller market capitalization compared to those within large-cap funds. While these funds offer the potential for higher returns due to the growth potential of smaller companies, they inherently carry a greater degree of volatility and risk.

Smaller companies may be more susceptible to economic downturns, changes in industry trends, and company-specific events that can significantly impact their stock prices. This translates to a heightened level of risk for investors in mid and small cap funds.

[Read: Liquidity Check: Is Your Small Cap Fund Under Pressure?]

The new guidelines offer investors a valuable tool to assess the risks associated with this specific segment of equity funds before committing their financial resources.

The AMFI guideline comes at a time when both retail and institutional investors are increasingly flocking to mid and small cap mutual funds, attracted by the potential for high returns. However, without adequate risk disclosure, investors may underestimate the inherent volatility associated with these funds.

According to the AMFI notice, all AMCs shall disclose the results of Stress Test and liquidity, volatility, valuation and portfolio turnover in respect of Mid Cap and Small Cap equity schemes. It should be mentioned on respective fund house’s websites, as well as on AMFI’s website on a monthly basis within 15 days after each month, starting with disclosure for the month of February 2024 by 15th March, 2024.

The format which was prepared in consultation with SEBI mandates disclosure of –

• Annualised Standard Deviation in respect of the scheme portfolio as well as the scheme benchmark index
• Portfolio Beta
• Portfolio Trailing 12-month PE in respect of the scheme portfolio as well as the scheme benchmark index
• Portfolio Turnover

The disclosure of these risk parameters plays a crucial role in empowering investors with a greater understanding of the risks they undertake when investing in mid and small cap funds. This transparency enables them to make informed decisions that align with their risk tolerance and investment goals.