Smallcaps still find favour: AMFI data dismisses fears of trend reversal

In March, the financial markets took investors on a rollercoaster ride, with small-cap funds witnessing a net outflow of ₹94.2 crore, breaking a streak spanning two-and-half years, while largecaps enjoyed an influx of ₹2,127 crore, triggering chatter about a potential trend shift.

However, April witnessed a refreshing change with small-cap funds staging a remarkable comeback, with ₹2,208 crore in net inflows, putting worries of a reversal to rest. In fact even large-caps joined the party to record inflows of ₹349 crore.

“Both small-cap and mid-cap schemes saw notable inflows, reflecting a distinct attraction toward SMID schemes among investors,” Abhilash Pagaria, head, Nuvama Alternative and Quantitative Research, said.

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Nonetheless, elevated valuations has been a challenge in replicating returns of previous years underscoring the importance of maintaining a 3-5 year investment horizon to mitigate potential setback, he said.

Senior fund manager at Tata Asset Management, Chandraprakash Padiyar, echoed similar sentiments, expressing doubts about sustaining past returns.

However, he is bullish about the potential for a decent earnings growth among small-and mid-cap firms with promising growth opportunities in manufacturing, logistics and supply chain, aided by initiatives like Make in India, and production-linked incentive schemes.

While Padiyar anticipates a favourable a risk-reward ratio for the broader market, driven by sustained earnings growth over the next five years.

A section of experts however, were of the view that some consolidation may be necessary to ensure the market is on a healthy trajectory.

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Inflows and schemes

Although data from the Association of Mutual Funds in India (AMFI) showed a 16.4% decline in equity mutual fund inflows in April, totalling ₹18,917 crore compared to ₹22,633 crore the previous month, inflows into equity funds was positive for the 38th consecutive month.

While equity schemes saw a steady influx during April, it also marked the lowest inflow in four months, Pagaria said. “While the inflows slowed compared to previous months, the fluctuations are not unexpected”.

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According to Nirav Karkera, head, research, Fisdom, a Bengaluru-based wealthtech startup, there has been a subtle shift among investors following the stress test result and newfound sense of confidence due to greater transparency, and assurances of well-managed funds.

One reason for the robust equity inflows is contributions from systematic investment plans (SIPs) which stood at an all-time high of ₹20,371 crore in April, against ₹19,270 crore in March. In April, the number of SIP accounts reached a new high of 8,70,11,401, surpassing March’s count of 8,39,71,299.

Assets under management (AUM) of SIPs also reached an all-time high of ₹11,26,128.67 crore , against ₹10,71,665 crore in March. Besides, MF folios hit a record of 18,14,68,286.

Retail mutual fund folios, comprising equity, hybrid, and solution oriented schemes was at record high of 14,53,57,892 in April. In March, folio count was at 14,24,42,823. Retail AUM was at ₹32,82,225 crore in April.

Despite that, Padiyar said diversified funds would be a better bet for long term compared to sectoral or thematic funds, especially if valuations are on the higher side.

In April, mutual funds AUM rose by 7% to ₹56.99 trillion, against ₹53.12 trillion in the previous month. In April, only nine open-ended New Fund Offers were floated, mobilising around ₹1,532 crore.

KYC holdup

AMFI’s chief executive officer Venkat Chalasani said the decline in mutual fund inflows in April was not influenced by the KYC compliance issues.

While 93% of mutual fund accounts had either validated or registered Know Your Customer (KYC) status, only 3% of the accounts are currently on ‘KYC Hold’ status.

“With regard to KYC norms applicable effective April, the MF industry is addressing concerns for a smooth process. Together with AMCs, distributors and other stakeholders, we are committed to facilitating a seamless KYC validation process for all, thereby ensuring integrity and accessibility of mutual fund investments across the board,” he added.

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