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Business News/ News / India/  Smallcap funds see outflow for first time in 2.5 years

Smallcap funds see outflow for first time in 2.5 years

While smallcap funds witnessed outflow of ₹94.2 crore, the first time since Sep 2021 ( ₹248.73 crore), midcap funds saw a 43% sequential slowdown in inflows to ₹1,017.69 crore in March.

Equity mutual fund inflows fall in March 2024: AMFI data Premium
Equity mutual fund inflows fall in March 2024: AMFI data

In what may be seen as an aberration, smallcap funds witnessed a net outflow for the first time in two-and-a-half years in March while midcap fund flows slowed to multi year lows. This followed capital markets regulator Sebi raising concerns of froth in pockets of small- and midcap stocks and directing mutual funds to run stress tests on their small and midcap fund portfolios in March.

While smallcap funds witnessed outflow of 94.2 crore, the first time since September 2021 ( 248.73 crore), midcap funds saw a 43% month on month decline to 1,017.69 crore in March, according to Association of Mutual Funds in India (Amfi). This was the slowest pace of inflows since October 2021 ( 376.19 crore).

The smallcap outflows and slowdown in midcap flows dragged down the total net equity inflows by 16% to 22,633 crore in March. The concern over regulatory advisories and restriction of inflows into smallcap schemes by the likes of Kotak MF, ICICI Pru Smallcap Fund, drove down the net inflows into equity funds by 16% to 22,633 crore from the preceding month.

However, market mavens saw the smallcap outflow as a one-off, sparked by regulatory advisories.

“It’s an aberration," said DP Singh, deputy MD & joint CEO at SBI MF. “Even the quantum of outflow is pretty insignificant."

The fall in the Nifty smallcap 250 index by -4.2% to 14,330.50 and in the Nifty Midcap 150 Index by -0.36% to 17,766 resulted in rotation of investor funds to large caps, resulting in large cap fund net inflow hitting a 21-month high of 2,127.79 crore and of the Nifty 50 outperforming the midcap and smallcap indices.

“Equity net flows dipped led by a fall in flows in small and midcap category," Anand Vardarajan, business head – banking, Institutional Clients, Alternate Products and Product Strategy, Tata Asset Management. "The stress test results in the small and midcap space coupled with high valuations could be the reason for flows to ebb here. There is a slight rotation we are seeing where large cap and predominantly large cap funds like flexi cap or large and mid have benefited in flows at the margin as investors may be moving in here due to relative valuation comfort."

The fact of aberration is borne by Smids outperforming large caps in April. For instance, while Nifty 50 gained 1.3% so far this month, Nifty Midcap 150 and Nifty Smallcap 250 gained 2.9%, and 4.2%.

However, small-cap stocks stole the show in FY2024, with the Nifty Small Cap 250 index surging 63%. This outpaced both the Nifty Midcap 150 (56.5%) and Nifty 50 (28.6%). This strong performance was reflected in investor preference, with small-cap funds attracting significant inflows ( 40,188.55 crore) compared to mid-cap ( 22,226 crore) and large-cap funds (outflow of 613.26 crore).

Systematic investment plan (SIP) flows hit a record high for the second consecutive month at 19,271 crore in March against 19,187 crore previous month.

The Indian mutual fund industry witnessed significant growth in March 2024. Net AUM surged by 35.47% year-on-year to a record high of 53.4 trillion. The number of investor accounts (folios) also rose by 22% year-on-year to reach 177.8 million.

“Highlight of March data was the net outflows of 94.17 crore from small cap funds, the first time since the start of the small cap bull run at the beginning of the year," said Gopal Kavalireddi, vice president of Research at FYERS. "Owing to large valuation gap, smart investors initiated a portfolio rebalancing in January and continued the shift over the last two month."

The Indian mutual fund industry experienced a significant drop in net inflows in March. This decline was driven by a shift in investor sentiment away from debt funds. In February, debt funds had seen inflows of 63,808.82 crore, but this reversed sharply in March with outflows of 1.98 trillion mainly due to quarter-end advance tax payments.

“Total inflows into mutual fund industry fell by 1.59 trillion on the back of quarter ending advance tax payments, regular redemptions from debt funds and higher valuations in mid and small cap space. Net flows into debt funds were negative at 1.98 trillion, while equity funds garnered 22,633 crore, with 5,584 crore by hybrid funds," Kavalireddi said.

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Mayur Bhalerao
"Mayur spearheads data-driven reporting on IPOs for Mint. He also covers market trends, and corporate announcements to ensure comprehensive coverage of the financial landscape. Mayur believes in harnessing the power of Bloomberg Terminal and Capital Line to extract and disseminate critical financial data to cross-functional teams within the newsroom and beyond. disseminate critical financial data to cross-functional teams within the newsroom and beyond."
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Published: 10 Apr 2024, 02:03 PM IST
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