Investors turn to riskier bets as large-cap funds see net outflows in July

Investors are gradually turning sour on large-cap stocks as they favour small- and mid-cap shares in search of returns above the broader market, or alpha.

Large-cap funds saw net outflows of ₹1,321 crore in July, the first monthly outflow in nearly three years, according to data from the Association of Mutual Funds of India (Amfi). By contrast, investors pumped ₹7,767 crore into small-cap funds during the month, while mid-cap funds saw inflows of ₹6,192 crore.

Investor preference for small- and mid-cap stocks over large-caps is also evident in the fund flow data. Compared with the 12-month average monthly flow, large-cap funds saw a 164% decline in net flows in July, indicating a shift to net outflows. In contrast, inflows into small-cap funds increased by 61%, while those into mid-cap funds rose by 27%.

Viraj Gandhi, chief executive officer at Samco Mutual Fund, said that the outflows from large-cap, a moderation in flexi-cap, and the pullback from balanced advantage funds (BAF) and equity savings funds together suggest that retail investors have largely priced in the recent market concerns, and are increasingly willing to pursue concentrated domestic risk for alpha generation over their long-term investment horizon.

Overall, monthly net inflows into equity mutual funds slowed by 15.7% to ₹24,685 crore in July.

After hitting a 52-week low on 23 March this year, the Nifty Smallcap 250 index has risen by 29%. Similarly, the Nifty Midcap 150 index has gained 21% since it touched a 52-week low on 30 March. In contrast, the Nifty 50 index has risen only 10% since its 52-week low hit on 30 March.

The US-Iran war, which began on 28 February, roiled financial markets worldwide, and ongoing tensions continue to weigh on sentiment. However, investors appear to have adjusted to the conflict’s prolonged nature.

Experts say that investors are turning towards higher alpha generation categories and stepping away from conservative funds.

Net inflows into hybrid fund categories like BAF and equity savings funds have fallen by ₹252 crore and ₹477 crore, respectively, in July.

Ankur Punj, managing director and business head, Equirus Wealth, said that the moderation in equity mutual fund inflows reflects a degree of selectivity.

“While large-cap funds saw a sharp reversal into outflows, strong inflows into small-cap and other equity categories indicate that investors continue to seek growth opportunities. The trend also highlights ongoing portfolio rebalancing amid evolving valuations, with investors favouring segments that offer stronger long-term return potential while remaining mindful of associated risks,” Punj added.

The monthly systematic investment plan (SIP) book increased to ₹31,960 crore in July, up from ₹31,780 crore in the previous month, indicating a month-on-month increase in SIP contributions.

There were 25 new fund offers (NFOs) in July, which attracted investments worth ₹2,022 crore during the month.