Mutual funds: These categories got a thumbs up in the first 6 months, what should investors do now?

Small cap mutual funds received a thumbs up from retail and institutional investors, thus pushing the total inflows in the first six months to the tune of ₹22,048 crore. The AMFI (Association of Mutual Funds in India) data shows this to be highest among mutual fund categories based on the market capitalisation.

These (small caps) were followed by the mid-cap funds, which received around ₹10,871 crore in half a year. Interestingly, the large cap funds saw a redemption to the tune of ₹5,697 crore during this period. Index mutual funds also saw a substantial inflow, over ₹4,100 crore in the first six months of this fiscal.

Let us take a deep dive into these numbers and untangle the mystery behind them.

Spike in small cap funds

Small cap funds have undoubtedly run-up already and as a result, retail investors are incentivised to invest in these schemes. Wealth advisors, therefore, tell investors to refrain from making incremental investment in these schemes.

“Money has been chasing small caps and they have run up quite a lot. Now investors are entering at the top levels. This is typical of the retail investors’ behaviour where people don’t invest when the prices are low. This is, in fact, a cause of worry as investors should ideally enter at a lower price level and sell it at a higher level, instead of investing at a top level. We have advised our clients to stop the incremental investing in small and medium caps, at least for the time being,” says Ravi Saraogi, Co-founder of Samasthiti Advisors.

“At the same time, there are some redemptions in large cap funds, particularly in the active mutual funds because they often fail to beat the benchmark, something a recent report has also highlighted. At the same time, inflow is rising in index mutual funds which have given consistently good returns,” he adds.

(Source: AMFI; figures in ₹crore)

Should you still invest in small and mid-caps?

Although investment advisors have been suggesting investors to refrain from investing into the small caps, some are of the view that the proposition can still be explored, particularly when investors have a long-term horizon of 7-10 years.

“If someone has a long-term horizon of 7-10 years, then one can explore the idea of taking a 30-40 percent exposure to small and mid-cap funds. And the best way to do it is through SIPs. This way, you can get exposure across money cycles and across valuations,” Amol Joshi, Founder of Plan Rupee Investment Service says.

Inflow in balanced advantage funds

Another trend that has come to the fore is that balanced advantage mutual funds saw a positive inflow in the past few months, thus bringing it to a total of ₹3,487 crore.

While speaking about the balance advantage funds, Amol Joshi says that irrespective of the market phase and cycle, one can consider investing into this category.

“Even when there is a frenzy, there is a segment that takes exposure to risky assets in a balanced way via these funds. They are advisable for investors who don’t have a very high risk, but marginal risk appetite. It is an all-season product. It is preferable to those who want a moderate risk and return,” he adds.