Kotak Mutual Fund commenced accepting new assets (lumpsum and SIP) into their small-cap fund on July 2, 2024. They had earlier banned inflows in March 2024, citing worries about high valuations and market volatility.  Due to worries over valuations and liquidity in the small-cap area, the fund house said on February 26 that clients can contribute a maximum of Rs 2 lakh as a lump payment per month and Rs 25,000 per month via the Systematic Investment Plan (SIP) method.

This decision to restart investing coincides with Kotak MF's strong outlook on the future earnings potential of small-cap firms. "We predict that profits growth of small-caps will increase, and firms are on track for strong growth," the investment company noted in a communication to investors. They see the increasing economy as a crucial aspect that will assist smaller enterprises and may justify their values.

However, Kotak MF advises investors to take a balanced approach. "While small-caps have performed well in the past, it's important to set realistic expectations," they reminded us. The current increase in returns is unlikely to persist in the long run, thus investors should avoid over-allocating based on this performance.

This decision by Kotak MF reflects a change in public opinion toward small-cap funds. It follows the lead of other fund institutions, such as ICICI Prudential, Tata, and Nippon India, who have previously restricted small-cap inflows owing to similar concerns. Kotak MF's relaxation of limits indicates confidence that the small-cap sector is poised for continuing expansion, supported by rising business profitability. However, investors are advised to take caution and keep their portfolios diversified.

Kotak MF outlines their decision to reduce constraints using a two-pronged approach:

Business Cycle and Recent Events:  They took into account the present state of the economy as well as recent events, such as the just finished elections.  They are certain that the upward trend of the last decade will continue, and that the general business climate will stay favorable.

Favorable Market Conditions: Kotak MF discovered many factors that suggest a bullish business cycle, including robust profit margins relative to GDP, low corporate debt levels, and strong bank balance sheets. These elements, together with the Indian economy's long-term development potential, increased their confidence in the small-cap sector.