Investors exit index funds in June on profit booking strategies

Index funds experienced outflows in the month of June, marking a notable shift from the inflows seen in April and May. After attracting around Rs 147 crore in April and approximately Rs 109 crore in May, index funds reported an outflow of Rs 906 crore in June. This trend coincided with the underperformance of large-cap stocks compared to mid-cap and small-cap stocks.

Chirag Mehta, the Chief Investment Officer at Quantum AMC attributed the outflows in index funds to profit booking strategies employed by investors.

"Largecaps have not been doing well as compared to mid and smallcaps. So, if you look at index funds, they are usually largecap oriented and track the frontline indices like Nifty or Sensex. Therefore, given that the relative performance of mid and smallcap is much better as compared to the largecaps, we are seeing that shift," Mehta told CNBC-TV18.

Mehta added that if the broader market continues to perform well, considering the current stage of the economic cycle, this trend of favouring mid-cap and small-cap stocks may persist for some time.

While it is essential to understand the prevailing trends in index funds, it is equally important to recognise the inherent advantages they offer to investors. Mehta stated that index funds passively mirror the performance of a specific index, reducing the risks associated with active fund management.

"They are characterised by their low costs, high liquidity and simplicity, making them easily accessible and understandable for investors," he said.

To conclude, index funds can serve as a short-term tactical investment option for individuals who wish to participate in the equity markets without the need for extensive research or a specific fund or stock selection.