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Small cap fund inflows grow over 10% in July: Is it the right time to invest?

All of the major categories of equity fund inflows have dropped, but small-cap funds are the only ones where positive inflows have slightly increased (iStock)Premium
All of the major categories of equity fund inflows have dropped, but small-cap funds are the only ones where positive inflows have slightly increased (iStock)

  • Net positive inflows to equity mutual funds fell by 42% in July to 8,898.25 crore from 15,497.76 crore in June 2022, according to monthly statistics released by the Association of Mutual Funds in India (AMFI)

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Net positive inflows to equity mutual funds fell by 42% in July to 8,898.25 crore from 15,497.76 crore in June 2022, according to monthly statistics released by the Association of Mutual Funds in India (AMFI). With the exception of small-cap funds, all other equity funds' positive inflows have fallen precipitously in July compared to June, by a range of 32% to 48%. In comparison to June, positive inflows into ELSS funds fell by 48%, those into large-cap funds by 48%, those into large & mid-cap funds by 43%, those into mid-cap funds by 32%, and those into Flexi cap funds by 44%. Analysts have forecast that a number of variables, including increasing interest rates, a falling rupee, geopolitical unrest, and the China-Taiwan Strait crisis, have contributed to the decline in equity inflows.

All the major categories of equity fund inflows have dropped, but small-cap funds are the only ones where positive inflows have slightly increased. Positive inflows for small-cap funds increased by 10.11% to 1,779.45 Cr in July from 1,615.92 Cr in June. But considering this, should investors think about investing in small-cap funds, and if so, is it the ideal moment to do so? Let's elucidate our analysts' conclusions.

Commenting on the performance of the small-cap index Richa Agarwal, Senior Research Analyst, Equitymaster said “While the smallcap index itself is down 11% from January highs, the correction in individual stocks has been significant, making the valuations attractive. The smallcap to Sensex ratio has come down from 0.51 times in January to 0.47 times, compared to a long-term median of 0.43 times. The market sentiments have witnessed an overall recovery post a weak outlook for most part of this year."

She further added that “I don’t have a view on smallcap funds, but I do believe that the opportunity in select small caps is strong given the corrections and their fundamentals. It is a good time to adopt a bottom up approach, rather than operate from a place of fear or greed for small-caps."

By giving his views on the performance of small-cap index, Nitin Rao,Head Products and Proposition, Epsilon Money Mart said “Since the beginning of the year various factors have downplayed equity indices performance with small cap index getting impacted the most in comparison to large cap & mid cap. As on 31 July 2022, BSE Small Cap TRI index is down 7.70% compared to BSE Large Cap TRI index which is marginally green during the same time. Key reasons for the fall can be attributed to geo-political issues in Ukraine, rising inflation, rising interest rates and so on."

Commenting on the performance of small-cap funds, Nitin Rao said “However, not all small-cap funds have delivered negative returns on a YTD basis, there are select funds which have delivered positive return during this period purely because of the stock picking ability of the fund managers. Looking at history, there is a possibility that the small and mid-cap index may bounce back quickly relative to the large-cap index as factors such as healthy earnings season, good monsoon, and pent-up consumption demand as we enter festive season will play out."

By asking him for the right time to invest in small cap funds, Nitin Rao said “It's always a good time to invest in equities, however, one should invest in line with his/her investment objective and time horizon. Small-cap funds offer room for investors who understand the risk associated with them and are willing to stay invested over a long period (5-7 years). Any investor who is willing to take the risk and is willing to stay invested during the volatile period should consider investing in a small cap fund. Investors can also look at SIP option for taking exposure to small-cap funds."

In July, mutual fund SIP accounts totalled Rs. 5.62 crore, up from Rs. 5.55 crore in June. Additionally, compared to June's figure of Rs. 12,276 Cr., the total amount received through SIP in July 2022 was Rs. 12,140 Cr. Investors may continue their SIP in equity mutual funds by getting advice from their financial advisers. 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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