Equity mutual funds, often considered a barometer of retail and institutional investor sentiment, saw a substantial net inflow of Rs 20,161 crore in August 2023. This surge marked a significant departure from the Rs 7,505 crore recorded in July, establishing August as the month with the highest mutual fund inflows in the past five months.
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Small caps surge ahead
Leading the charge in this mutual fund influx were small-cap funds, which continued their impressive performance from previous months. These funds, characterised by their focus on smaller companies, drew the highest net inflows in August. This was followed closely by thematic/sectoral funds and multicap funds, as reported by Akhil Chaturvedi, Chief Business Officer at Motilal Oswal AMC.
Melvyn Santarita, Analyst - Manager Research at Morningstar India, highlighted that despite concerns about overvaluation, both small-cap and mid-cap categories continued to attract substantial inflows. The multicap category also experienced increased flows, buoyed by the launch of the Mirae Asset Multicap Fund.
As more investors participate in the market, the traditionally crowded space of large-cap stocks is undergoing a transformation. Smaller companies are gaining more attention, and while some pockets of small-cap stocks may be experiencing overvaluation, the broader trend of increasing market breadth signifies the deepening of India's capital market, experts say.
Maturity in retail investor behavior
Kislay Upadhyay, Smallcase manager and Founder of FidelFolio Investments, observed that retail investors are displaying a more mature approach to their investments.
"What's fascinating is that this mature behavior is mirrored across both large and small investors, as evidenced by the corresponding trends in the number of folios and net inflows. This suggests a widespread shift towards active equity funds and a growing sophistication in investment strategies among investors of all stripes," he said.
Manish Mehta, National Head – Sales, Marketing & Digital Business at Kotak Mahindra Asset Management Company, noted a trend of "sell on market highs and purchase on lows" in the higher equity net sales for August. This behavior was further influenced by collections through new fund offerings (NFOs) in the equity and hybrid category.
Caution amidst the rally
While both mid-cap and small-cap indexes have experienced sharp rallies over the past six months and one year, investors are reminded of the inherent volatility and drawdown risks associated with these categories. Therefore, a long-term investment horizon and the SIP route are recommended strategies for navigating this volatility while capitalising on potential returns.
According to Mukesh Kochar, National Head, Wealth Management at AUM Capital, investors should rebalance their portfolios by increasing exposure to large-cap funds.
"Due to overrun by small-cap space the overall exposure must have increased in this space which needs to be rebalanced," he said.
Outflows in specific categories
It's worth noting that not all categories experienced positive net inflows. Focused funds, large-cap funds, and Equity Linked Savings Schemes (ELSS) saw net outflows in August. Large-cap funds, in particular, have faced challenges in beating passive funds, possibly leading some investors to opt for passive investment routes.
First Published: Sept 11, 2023 4:18 PM IST
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