Kotak Mutual Fund lifted the restriction on investment in its small-cap fund after four months as the fund house saw earnings growth in this sector.

“We are resuming the subscription of units in Kotak Small Cap Fund, effective July 2. Political uncertainties around India’s elections are behind us. This has reduced market volatility, making the market more stable for small-cap stocks,” said Kotak Mutual Fund.

The fund house believes that earnings growth of small-caps is expected to improve, and companies are poised for robust earnings growth. As the economy continues to expand, smaller businesses are well-positioned to benefit, potentially supporting their valuations, it said.

Kotak MF added that while small caps have performed well in the past, it is important to set realistic  expectations. The returns seen recently are unlikely to continue at the same pace and may become more normalized. Hence, avoid the temptation to over-allocate based on recent performance, it added.

Kotak MF restricted flows into its small-cap scheme from March 4, joining Nippon MF and Tata MF in limiting investments.  Fund managers found  it challenging to handle continuous flows amid elevated valuations.

In February, the fund house said in a notice that fresh subscriptions through lumpsums would be restricted for each investor to ₹2 lakh per month. Investments through systematic investment plans were also capped at ₹25,000 for each investor per month.

Last year, Nippon India and Tata Mutual restricted  investments in their small-cap schemes.

Inflow into the small cap funds itself have slowed down in last few months due to huge volatility and sudden fall in stock prices. Investment in small cap funds have fallen 28 per cent in May to Rs 2,725 crore against Rs 3,777 crore logged in January.

BSE Small-cap index had dipped 6 per cent to 43,166 points in March agaist 45,722 points in January. However, it bounced back to regain most of the loss, hitting  52,988 points on Tuesday.

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