Large, mid-cap funds’ AUM soars 5x in 5 years, likely to see increased activity amid market volatility: ICRA Analytics

As domestic markets grapple with heightened volatility due to escalating geopolitical risks and global uncertainties, large and mid-cap funds are expected to attract significant investor interest, according to ICRA Analytics. These funds offer the dual advantage of portfolio diversification and the potential for attractive returns, making them appealing amidst the current market turbulence.

Over the past five years, large and mid-cap funds have experienced remarkable growth, with Assets Under Management (AUM) surging over five-fold from ₹0.50 lakh crore in July 2019 to ₹2.57 lakh crore in July 2024. his more than five-fold increase highlights the increasing appeal of these funds amidst heightened market volatility driven by escalating geopolitical risks and global uncertainties, according to ICRA Analytics.

These funds are attracting investors due to their ability to offer a diversified portfolio and promising returns. For example, the compound annualized returns for large and mid-cap funds are 44.07 percent for one year, 21.85 percent for three years, 23.67 percent for five years, and 16.40 percent for seven years, ICRA pointed out.

The surge in the number of folios, which has increased by 126 percent to 100.78 lakhs in July 2024 from 44.55 lakhs in July 2019, further underscores the growing investor interest.

“Given the escalating geopolitical risks, concerns over market valuations, and uncertainties surrounding the global interest rate cycle, large and mid-cap funds may offer stability and growth potential,” said Ashwini Kumar, Senior Vice President and Head of Market Data at ICRA Analytics. “Funds with exposure to companies with strong balance sheets and stable earnings growth can provide much-needed stability during periods of market volatility,” he added.

Net flows into these funds have surged by 276 percent, totaling ₹2,622.29 crore in July 2024 compared to ₹697.13 crore in July 2019, informed ICRA. The attraction lies in the combination of large-cap stability and the growth potential of mid-cap stocks, which can evolve into large-cap companies over time.

“Such funds are finding favour as they offer the dual benefit of the stability of the large cap stocks and the growth potential of mid cap stocks. Large cap companies are well established companies with strong balance sheet and good governance which imparts stability to the entire portfolio during market volatility. Mid cap companies meanwhile carry tremendous growth potential as they have the capacity to grow into large cap companies in the coming years,” Kumar pointed out.

MF industry clocks higher inflows

Despite market challenges, the Indian mutual fund industry has seen substantial inflows, with net inflows increasing by 130 percent to ₹1.89 lakh crore in July 2024, up from ₹82,046 crore the previous year. Net AUM also grew by 40 percent, nearing ₹65 lakh crore. Equity mutual funds saw a dramatic increase in inflows, surging over four times to ₹37,113 crore in July 2024 from ₹7,626 crore in July 2023, driven by investor confidence in India's financial market and economic prospects.

The resilience of Indian financial market coupled with improved growth prospects of the Indian economy is boosting investor confidence leading to increased participation of retail investors thereby contributing to higher inflows into equity mutual funds,” he noted.

Sectoral and thematic funds, which received ₹18,386 crore in inflows, are a notable area of interest. However, Kumar advises caution, emphasizing that these funds can be highly sensitive to sector-specific challenges. If the sector experiences difficulties, the entire fund may underperform. In contrast, diversified funds spread exposure across multiple sectors, offering better insulation from sector-specific shocks. Investors should thoroughly understand the sector and continuously monitor and rebalance their portfolios to mitigate the associated risks, he recommended.

In summary, large and mid-cap funds are likely to remain attractive to investors seeking stability and growth in a volatile market environment, with the mutual fund industry showing strong overall performance and resilience.

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