Equity MF drops to 21-month low in Nov; why investors prefer smallcap, midcap funds over large-caps?

Equities mutual funds continued to record inflow in November, however, the performance was gloomier despite the Sensex and Nifty 50 reaching record highs. Large-cap funds witnessed their worst outflows in 22 months. Equities MFs dropped to a 21-month low with an inflow of ₹2,258.35 crore. In November, debt market inflows outperformed equity-oriented schemes, while index funds were the star performers. Noteworthily, midcap and smallcap funds were preferred picks of investors in the equity mutual fund schemes.

As per the AMFI data, equity-oriented schemes registered an inflow of ₹2,258.35 crore --- far lower than the inflow they witnessed in October of ₹9,390.35 crore. Large-cap funds were worst hit with an outflow of ₹1,038.84 crore in November, while midcap and smallcap funds recorded a strong buying with an inflow of ₹1,176.31 crore and ₹1,378.24 crore. Thematic funds too saw a buying of ₹1,379.68 crore, although declining from the inflow of ₹2,686.33 crore in October.

Melvyn Santarita, Analyst – Manager Research, Morningstar India said, "The reduction in the flows could perhaps be attributed to some bit of profit booking in the large-cap segment as the markets surged in the month of November 2022."

Morningstar analyst added, "given the correction in mid and small caps over the last year, investors have been steadily allocating their money towards this segment of the market, possibly viewing this as a good investment opportunity. Also, it is worth pointing out that Index funds and ETFs have been witnessing steady inflows which could therefore mean investors could also be moving to passive funds as opposed to active funds in the large-cap segment."

Talking about markets performance, Santarita added, Indian markets continued their stellar run in November 2022 as it witnessed broad-based rallies across large, mid, and small caps. While DII were net sellers of Indian equity, FII returned as buyers in the month of November 2022 on account of how resilient the Indian economy and markets have been relative to other markets over the past year. Global markets too reacted on a positive note as inflation started showing signs of moderation in the US followed by the US Fed hinting at smaller rate hikes going ahead.

Further, Manish Maryada, Co-founder & CEO, Fello explained that despite the economic uncertainties, India has been witnessing an all-time high in the stock market and the recent trends of Nifty and Sensex records speak for it. From Nov 2020 to Nov 2021, a massive 50% increase in AUM for Equity funds has been witnessed but if you notice the growth from Nov 2021 to Nov 2022, it grew by 21%.

Maryada added, though the growth is significant, there are several reasons why the growth percentage hasn’t been similar to the previous year.

The CEO of Fello, which is India’s first game-based saving and investing platform, revealed that based on their consumer feedback and primary market research, we noticed that retail investors became repellent to savings and investments during the pandemic and chose the equities market, especially Mutual Funds, and invested without any primary research.

However, with the recent movement of markets, Fello Ceo added that investors have become much more averse and thoughtful before investing.

"They prefer to do market research before investing now and want to invest in smaller ticket sizes before investing in larger ticket sizes. This is a very healthy factor where retail investors are adapting to the markets and cultivating healthy behaviors before investing," Maryada explained.

On the other hand, debt-oriented schemes finally saw an inflow of ₹3,668.59 crore in November with liquid funds extending their strong buying for a second straight month to ₹34,276.44 crore. In October, debt mutual funds saw an outflow of ₹2,817.79 crore, however, liquid funds limited the selloff by recording an inflow of ₹19,084.60 crore during this month.

According to Priya Agrawal, Money Coach, LXME, within the debt segment, the Liquid Fund witnessed a significant inflow of ₹34,276 crores, followed by the Money Market Funds and Corporate Bond Funds. RBI is constantly taking measures for taming inflation due to which repo rates are being increased to keep inflation between RBI’s tolerance level. Due to this interest rates are increasing in the economy which might have affected the increase in inflow.

Unlike equities and debt, the hybrid schemes saw money going out of their baskets aggregating to ₹6,477.33 crore in November month due to a steep outflow in arbitrage funds to ₹4,074.64 crore.

Among other schemes, index funds recorded the most buying from investors in November with inflow coming to ₹8,601.73 crore. Notably, gold ETFs saw an outflow of ₹194.74 crore in November.

Agarwal said, "Gold ETFs witnessed a net outflow of ₹194 crores this month whereas, in the previous month the net inflow was ₹147 crores. This could be because of profit booking amidst the rally in the markets and gold demand in the households for the prevailing wedding season.”

Due to strong buying in index funds, it managed to offset the losses from hybrid funds, taking the open-ended mutual fund schemes inflow to ₹9,936.52 crore in November.

Under the closed-ended mutual fund schemes, fixed-term plan funds were top picks as they recorded an inflow of ₹3,274.46 crore. However, due to an outflow of ₹34.30 crore in ELSS, the closed-ended MFs saw an inflow of ₹3,240.16 crore.

Coming to Systematic Investment Plans (SIP), investors' appetite continues to grow stronger even in November with contributions in SIPs reaching a fresh record high of ₹13,307 crore.

Overall, the mutual funds market witnessed an inflow of ₹13,263.56 crore in November compared to ₹14,046.98 crore in October month. Meanwhile, net assets under management as of November 2022, stood at ₹40,37,560.81 crore.

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