Thematic funds lead Dec equity inflows, small caps follow: Where should you invest now?

Talking about the rising inflows in the category, Melvyn Santarita, Analyst and Manager Research at Morningstar Investment Research India, said the launch of four new funds in the month, namely Axis India Manufacturing Fund, DSP Banking & Financial Services Fund, Kotak Healthcare Fund and Quant Commodities Fund supported the category.

These new fund offers (NFOs) collectively amassed $4,259 crore, significantly contributing to the category's heightened influx.

Moreover, the small-cap category maintained its robust momentum, experiencing net inflows of ₹3,857.5 crore in December. Notably, the launch of Motilal Oswal Small Cap Fund was instrumental in garnering ₹1,226 crore during its NFO stage.

Gopal Kavalireddi, Vice President of Research at FYERS, highlighted investors' increased allocation to this market segment, considering the underperformance of large caps over the past nine months.

Conversely, the mid-cap category observed a comparatively moderate flow of ₹1,393 crore in December.

"This revealed a noteworthy dip in comparison to the preceding four months (August to November), potentially attributed to investors opting to capitalise on profits within this category, given its recent significant surge. Despite a fair bit of redemptions in the small-cap category, the quantum of purchases outweighed the outflows considerably," Santarita pointed out.

However, the equity landscape saw categories like large-cap (₹280.9 crore), focused (₹490.9 crore), and ELSS (₹313.5 crore) experiencing net outflows.

The investors' preference for passive investment vehicles, such as index funds and ETFs, might be a contributing factor to the disappointing flows in the large-cap category over the past year, as per Santarita's insights.

In the hybrid schemes category, net flows reached ₹15.009 crore, propelled by an influx of ₹10,645 crore into arbitrage funds.

This shift in allocation between equity and debt has been a consequence of Indian markets soaring to all-time highs, noted Kavalireddi, highlighting the inflows into multi-asset allocation funds and balanced advantage funds.

For the calendar year 2023, equity funds amassed net inflows of ₹1.61 lakh crore, with a significant 39% portion, amounting to ₹63,949 crore, being directed towards mid- and small-cap mutual funds.

Sectoral/thematic funds emerged as the subsequent favoured category, amassing ₹30,841 crore for the year.

On the contrary, large-cap and focused funds were the only sectors experiencing negative inflows of approximately 1.7% each.

Regarding investment strategies, Kavalireddi suggested a need for portfolio rebalancing between equity and debt, emphasising the substantial outperformance of Nifty mid-cap and Nifty small-cap by 46.6% and 55.6%, respectively, in just nine months.

"With an anticipated reversal in the interest rate cycle, investors are urged to consider this and reallocate across market capitalisations," he said.

Kavalireddi also highlighted the likelihood of the broader market undergoing consolidation in the current year, citing extreme valuations in mid and small caps compared to the relatively underperforming large-cap stocks.