Mid-cap mutual funds’ AUM exceed largecaps’ for the first time

Despite concerns over unsustainable valuations and froth-building, the ascent of mid-and small-cap segments continues unchecked. Although the midcap and smallcap indices have consistently outperformed benchmarks over the past year and in year-to-date 2024, as well as in most individual months this year, May saw midcaps outperforming while smallcaps underperformed the benchmarks.

In May, the Nifty Midcap index jumped 2.2 percent while the Smallcap index lost 1.3 percent. In comparison, the benchmark Nifty was down 0.3 percent.

Read here: Mid, smallcaps rise despite valuation concerns; what is driving broader market?

Despite smallcaps' underperformance in the previous month, inflows remained robust in small-cap and mid-cap funds for May, contrasting with lukewarm inflows seen in large-cap funds.

Mid-cap funds recorded net inflows of ₹2,724.67 crore, while small-cap funds saw ₹2,605.70 crore in net inflows. On the other hand, investor interest in large-cap funds remained subdued, with the category witnessing net investments of ₹663.09 crore during the month.

Viraj Gandhi, CEO of SAMCO MF, highlighted that for the first time, assets under management (AUM) in mid-cap mutual funds have exceeded those in large-cap mutual funds. AUM in mid-cap funds at the end of May stood at ₹3,28,183.33 crore while AUM in the large-cap funds stood at ₹3,23,155.66 crore. Meanwhile, for small-cap funds, the net AUM till May was ₹2,70,581.01 crore.

Read here: Foreign investors pour billions into India's booming small-cap stocks

Even the proportion of smallcaps to largecaps is at its highest peak. This shows where the party is going on in the MF industry, further noted Gandhi.

Despite the continued inflows in the broader market space, market experts remain in favour of large-cap stocks over mid-cap and small-cap stocks, citing recent outperformance and concerns over overexpensive valuations.

"In the current market scenario, investors should remain cautious about investing in momentum stocks or small-cap stocks which have remained overheated over the past two years. Any sustained period of sideways or downward movement in momentum stocks can trigger a sell-off in these stocks. Investors, therefore, should consider the risk involved before making such investments," said Vaibhav Porwal, Co-founder, Dezerv.

Read here: Avoid investing in midcaps, smallcaps, advise experts after massive outperformance

Meanwhile, Bernstein maintains an ‘underweight’ stance on small and mid-cap stocks compared to largecaps. It considers the recent market sell-down somewhat excessive in the short term, leaving room for a slight rebound, with capex-linked stocks expected to lead. Similarly, JM Financial continues to favor largecaps over small and midcaps from a market strategy standpoint, citing valuation comfort.

Overall, India’s benchmark indices were highly volatile in the last week of May 2024 in anticipation of election results. So far in June 2024, the volatility peaked on the day of actual results. The main reason for the volatility was the high expectations of market players that the BJP-led NDA would perform better compared to its previous term or its lower-than-expected performance in terms of seat count or a combination of both.

Before anybody can analyse it, benchmark indices are back to all-time highs. Event-specific risk of markets did materialise for a day or two but then the markets realised the stability of government and governance structure, which was restored, is the key essence of markets.

Read here: Equity mutual fund inflows skyrocket to record ₹34,697 crore in May: AMFI

Mutual fund inflows soared to a record high of ₹34,700 crore ahead of the election results, marking an 83 percent month-on-month (MoM) increase. This surge was fueled by significant inflows into sectoral funds and a robust resurgence in small-cap and mid-cap funds. Sectoral themes saw the highest collection of ₹19,213 crore, marking a remarkable 272 percent increase quarter-on-quarter.

Other segments leading in equity inflows included flexi-cap funds, with a net inflow of ₹3,150 crore (approximately 9 percent of equity funds' net inflow), along with healthy inflows in small-cap and mid-cap funds totaling ₹5,330 crore (approximately 15 percent of equity funds' net inflow).

The overall industry assets under management experienced a net inflow of approximately ₹1.1 trillion, pushing the overall AUM to ₹58.9 trillion, another all-time high, driven by strong inflows linked to equity funds. Equity funds' AUM grew by around 53 percent year-on-year and 3 percent MoM to reach a new all-time high of ₹25.4 trillion. While near-term volatility is expected to persist, optimism prevails over the mid-to-long-term horizon.

Read here: 5 top performing large and mid cap mutual funds over 10 years

The Systematic Investment Plan (SIP) book, primarily driven by retail investors, continued its growth trajectory, reaching nearly ₹21,00 crore ( ₹20,904 crore), up 2.6 percent from ₹20,371 crore in April 2024. It also rose 42 percent on a YoY basis. Moreover, Exchange Traded Funds (ETFs) also regained momentum during the election month following a slight dip in April 2024, with overall inflows reaching ₹15,600 crore, marking a 36 percent increase MoM. The overall ETFs' AUM grew by approximately 33 percent YoY and 2 percent MoM to reach ₹9.8 lakh crore.

Conversely, inflows into debt-oriented schemes remained subdued in May 2024, amounting to ₹42,300 crore compared to ₹1,90,000 crore in April 2024.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.