Small cap inflows dip in January, large and midcap funds shine: Where should you invest now?

On the other hand, largecap funds witnessed inflows of around ₹1,287.05 crore as against an outflow of ₹280.94 crore in December.

Mid-cap funds, however, emerged as a focal point of increased investor interest, with an inflow of ₹2,061 crore in January, up from ₹1,393 crore in the previous month.

The shift in preferences among investors has sparked discussions within the industry about the factors driving these changes.

Sunil Subramaniam, MD & CEO of Sundaram Mutual Fund, highlighted the premium positions of midcaps and smallcaps, stating, "The midcaps are at a 14% premium, and smallcaps at a 22% premium. So from a retail investor's perspective, I think the guidance from the AMCs, or its distribution partners, has been very good."

He also emphasised the success observed in the large-cap and larger midcap flows, attributing it to robust Systematic Investment Plan (SIP) numbers and a continued trend of investors taking a medium-term view of the market.

Anthony Heredia, MD & CEO of Mahindra Manulife Mutual Fund, provided insights into the evolving trends, stating, "This is the first couple of months we are seeing a reasonable decline in the smallcap. In fact, more than the net flow, look at the gross flow. The gross flows on smallcaps are less than 15% of the total flows."

He suggested a shift in investor focus towards large and midcap funds, as well as flexi and multicap funds, which he views as key products in the current market landscape.

In light of the data, industry experts see opportunities for fund managers to diversify.

Subramaniam noted the favorable conditions created by the significant Foreign Investor Investment (FII) outflow of ₹25,000 crore in January, presenting a valuable opportunity for fund managers to pick up quality stocks that were sold off.

Despite the Reserve Bank of India's decision to maintain the status quo on various bank rates and continue with a withdrawal of accommodation stance, Gopal Kavalireddi, Vice President of Research at FYERS said that the equity market remains subject to both domestic and international data points and events that could induce volatility.

As the current earnings season shows signs of improved operational management by companies, Kavalireddi advises investors not to be unduly worried.

Instead, he suggests reallocating capital by diversifying investments appropriately across undervalued asset classes and geographies.

In a market influenced by both positive and challenging factors, this strategic approach can help investors navigate uncertainties and capitalise on opportunities.

Melvyn Santarita, Analyst, Morningstar Investment Research India Private Limited suggested investors to note that while both the midcap and the small cap categories have the potential to deliver good returns, these categories inherently are volatile with sharp drawdown risks.

"Therefore, investors should have a long-term time horizon while investing in these categories. Opting to invest in these categories via the Systematic Investment Plan (SIP) route is a good way by which investors can ride the volatility whilst dollar cost averaging over long periods," he said.