Small-cap funds retain momentum as large caps bleed

Mutual fund data for June, 2023 released by AMFI on Monday noted strong, sustained inflows in the small-cap funds segment, while those in large caps, focussed and ELSS funds turned red last month. Even Index funds saw outflows worth Rs 905.74 crores. 

As per the report, net inflows in equities rose to Rs 8,637.49 crores in June, 2023, a steep rise when compared to inflows in April, 2023 (Rs 6,480 crores) and May (Rs 3,240 crores). Most of this influx was a result of continued positive interest in the small-cap fund segment. The equity MF segment also saw 6 new schemes launched in June, 2023, which raked in Rs 3,038 crores.

Notes Anita Gandhi, Whole Time Director, and Head of Institutional Business, Arihant Capital Markets Ltd, “The NIFTY Small Cap 100 index has delivered impressive returns of around 27% in the past year, reaching a new 52-week high. In a growing economy, small-cap companies often outpace GDP growth, offering the potential for earnings.” 

“Long-term investors can benefit from well-managed small-cap companies with promising business prospects and reasonable valuations, potentially leading to favourable investment returns. However, it is important to note that small-cap funds come with higher risk and volatility, so one should decide accordingly”, she continues. 

One of the reasons why equities continue to stay buoyant is sustained foreign fund inflows, anticipation of a favorable earnings quarter coupled with improving economic conditions. Notably, FPIs have made net investments worth Rs 21,124 crores in Indian economy, as of 10th July, 2023.

“Interestingly, the net flows seen in the small cap category in May 2023 (INR 3,282.5 crores) was its highest ever recorded till date. This record didn’t last for even a month, as the category’s net flows far exceeded its previous record. The last time these categories witnessed net outflows was in Feb 2021 (midcap) and Sep 2021 (small cap)”, highlighted Melvyn Santarita, Analyst – Manager Research, Morningstar India. 

However, given that the proportion of inflows in small-cap is not commensurate with profitable investment opportunities available, many AMCs like Nippon and Tata have cut down on new subscriptions in this space. 

Gold ETFs received a net inflow of Rs 70.32 crores in June, a figure significantly lower than Rs 103.12 crores it had amassed in May, 2023.

Debt funds see outflows after 2 months 

During June, 2023, debt segment saw net outflows worth Rs 14,135 crores. However, this was on expected lines, given that most of the outflows came from liquid and ultra short-term funds. These funds usually see heavy outflux during tax-related deadlines. Notably, June, being quarter end, is when corporate entities make advance tax payments. 

Despite this, investors continue to throng to money market funds. This is because while experts believe that India’s interest rate hike cycle has peaked, there is no clarity on which way it will take going ahead. 

Nevertheless, investors continued to bet on interest rate direction, since some movement was observed in Long Duration, Dynamic Bond, Gilt Fund and Floater Fund categories. Here, the duration is dynamically managed, and the funds try to benefit from the interest rate movements. However, there were less takers for funds that took credit bets, like medium duration and credit risks

“This shows that few investors are willing to invest in longer duration bonds in expectation of a cut in interest rates going ahead. As and when there is more clarity on the start of the interest rate cut cycle, these categories may witness enhanced flows”, notes Santarita