Market regulator Sebi recently expressed concerns about the increasing inflow into small-cap and mid-cap funds. However, industry experts have stated that there are currently no significant signs of redemptions within this sector.
Despite Sebi’s concerns, investors are expected to remain interested in these funds due to their potential for delivering high returns, experts noted.
Sebi’s directive, issued last month, urged mutual fund companies to establish a framework to protect the interests of investors in small and mid-cap funds, given the growing frothiness in these segments.
This directive follows a significant influx of investments into small and mid-cap mutual fund schemes over the past few quarters. In 2023, for instance, mid-cap schemes received investments totaling nearly Rs 23,000 crore, while small-cap schemes attracted over Rs 41,000 crore. Similarly, in 2022, mid-cap funds saw inflows of Rs 20,550 crore, and small-cap funds received Rs 19,795 crore.
On the contrary, large-cap mutual funds witnessed an outflow of nearly Rs 3,000 crore in 2023, while experiencing an inflow of Rs 7,281 crore in 2022.
“Investments have traditionally followed returns, particularly towards small and mid-cap funds, a trend likely to persist despite recent warnings.
“At present, we haven’t observed any significant redemptions in this segment. With small and mid-cap funds holding substantial cash balances and receiving monthly SIP inflows, substantial corrections are unlikely unless catalyzed by specific events,” remarked Jay Shah, Founder and CEO of Finwisor.
Mid-cap and small-cap stocks tend to perform well in environments characterized by high GDP growth, robust mutual fund inflows, and lower interest rates.
Given that 2024 is an election year and markets favor large-cap stocks, Niket Shah, Fund Manager at Motilal Oswal AMC, anticipates a consolidation in the small and mid-cap segments in the short term. However, investors are expected to persist in pursuing these funds for their potential high returns unless there is a significant downturn in stock prices.
“We anticipate strong GDP growth over the next five years, driven by government infrastructure focus and increased private sector investments. Mutual fund inflows, particularly into mid-caps, are also expected to remain robust,” he added.
Shah oversees the Motilal Oswal Midcap Fund, which recently celebrated its 10th anniversary and has amassed an AUM of nearly Rs 8,490 crore.
Over the past five years until calendar year 2022, mid-cap and small-cap funds have delivered returns of 42 percent and 71 percent, respectively.
Shah of Finwisor advised investors who have solely relied on past returns to invest in small-cap and mid-cap funds to consider shifting their equity allocation towards large-cap funds. He recommended continuing equity investments through SIPs (Systematic Investment Plans).
Additionally, Kaustubh Belapurkar, Director – Manager Research at Morningstar Investment Research India, suggested that investors considering small and mid-cap funds should have realistic return expectations and be prepared for interim volatility.
Feroze Azeez, Deputy CEO at Anand Rathi Wealth, recommended a market cap mix of 50-60 percent in large-cap and the remainder in mid-cap and small-cap funds. He advised investors to conduct portfolio reviews annually.