Investors are increasingly piling into riskier small- and mid-cap mutual funds while moving away from index-linked large-cap funds, tempted by strong recent performance in the broader market.
Large-cap funds have seen net outflows for two consecutive months. In August, the category saw an outflow of ₹1,147 crore, following a net outflow of ₹1,321 crore in July, according to data from the Association of Mutual Funds in India (AMFI).
In contrast, small-cap and mid-cap funds continued to attract strong flows. Small-cap funds recorded their highest monthly inflow in two years at ₹7,973 crore in August. Mid-cap funds also saw strong inflows of ₹6,989 crore, their highest in two years.
Viraj Gandhi, chief executive officer (CEO) of Samco Mutual Fund, said small-cap schemes collected well above their 12-month average monthly inflow of ₹4,946 crore in August. Mid-cap schemes also recorded collections significantly above their 12-month average of ₹4,946 crore during August.
“In contrast, large-cap schemes have fallen from a monthly collection of ₹1,176 crore over the past 12 months to an outflow in August,” Gandhi said.
This is a classic case of performance-chasing, where investors tend to favour categories that have recently outperformed.
The shift in investor preference comes after a strong rally in small- and mid-cap stocks following a prolonged period of stagnation.
The broader market has started rebounding since April. Since 1 April, the Nifty Smallcap 250 index has delivered returns of 24.97%, while the Nifty Midcap 250 index has gained 15.71% over the same period. In comparison, the Nifty 50 index has delivered a much lower return of 3.32%.
“The mid- and small-cap companies of five years ago were much smaller in size than the opportunity set we see today, with several new businesses and segments emerging and growing faster within the broader market. If investors want to participate in the faster-growing parts of the economy, opportunities beyond the large-cap segment naturally become more relevant,” said Suranjana Borthakhur, head of distribution & strategic alliances, Mirae Asset Investment Managers (India).
This view is also supported by the healthy earnings seen across the mid- and small-cap space, Borthakhur said. “At the same time, large-caps have been relatively tepid, partly due to the slower performance of sectors such as BFSI (banking, financial services, and insurance) and IT, which has further shifted investor attention towards mid- and small-caps.”
The positioning of investors suggests that instead of reducing their participation in equities because the benchmark index has remained relatively stagnant, they are directing their investments towards segments that have delivered stronger returns.
As a result, even though the benchmark index has remained relatively subdued, investors have not reduced their investments into equity mutual funds. Instead, they appear to be selectively increasing their exposure to categories that have generated higher returns recently.
Net inflows into equity mutual funds increased 18% month-on-month to ₹29,328 crore in August, highlighting continued investor appetite for equities.
Investors should opt for systematic investment plans (SIPs) rather than lump-sum investments in small- and mid-cap funds and have a minimum holding period of seven years, as the space looks somewhat overvalued, said Juzer Gabajiwala, director at Ventura.
Investors also need to rationalize their return expectations in the small- and mid-cap space, Gabajiwala said.
Among other equity mutual fund categories, inflows into large- and mid-cap funds rose 13% month-on-month to ₹3,872 crore in August.
Thematic funds also saw a reversal in sentiment, recording a net inflow of ₹1,766 crore in August, compared with a net outflow of ₹959 crore in July.
Meanwhile, flexi-cap funds inflows increased 7% month-on-month to ₹5,059 crore in August.