Explained: Kotak MF has resumed lumpsum and SIP investments in small-caps

Kotak Mutual Fund resumed allowing new investments (lumpsum and SIP) into their small-cap fund on July 2, 2024. They had previously restricted inflows in March 2024 due to concerns about high valuations and market volatility. 

On February 26, the fund house had said that investors can put in a maximum of Rs 2 lakh as lump sum each month and Rs 25,000 per month through the systematic investment plan (SIP) route due to concerns over valuations and liquidity in the small-cap space.

This decision to resume investments comes amidst positive sentiment from Kotak MF regarding the future earnings potential of small-cap companies. "We believe that earnings growth of smallcaps is expected to improve, and companies are poised for robust growth," the fund house stated in an email to investors. 

They credit the expanding economy as a key factor that will benefit smaller businesses and potentially justify their valuations.

However, Kotak MF has advised investors to maintain a balanced approach. "While smallcaps have performed well in the past, it's important to set realistic expectations," they cautioned. The recent surge in returns is unlikely to be sustainable in the long run, and investors should avoid over-allocating based on this performance.

This move by Kotak MF signifies a shift in the overall sentiment towards small-cap funds. It follows a trend of other fund houses, like ICICI Prudential, Tata, and Nippon India, who had previously imposed limitations on small-cap inflows due to similar concerns. The easing of restrictions by Kotak MF suggests a belief that the small-cap sector is poised for continued growth, underpinned by improving company earnings. However, investors are urged to exercise caution and maintain a diversified portfolio.

Rationale  behind the move: 

Kotak MF explains their decision to ease restrictions by outlining a two-pronged approach:

Business cycle and recent events:  They considered the current stage of the business cycle and recent events, including the concluded elections.  Confident that the positive trajectory established over the past decade will continue, they believe the overall business environment will remain favorable.

Favorable Market Conditions:  Kotak MF identified multiple indicators pointing towards a positive business cycle, including healthy profit margins relative to GDP, low corporate debt levels, and strong bank balance sheets. These factors, combined with the long-term growth prospects of the Indian economy, fueled their optimism for the small-cap sector.