No alarming signs of redemptions in small-cap, mid-cap funds: Experts

Amid market regulator Sebi's concern over heightened inflow in small-cap and mid-cap funds, industry experts said they do not see any alarming signs of redemptions in this space.
Despite the concerns, investors are anticipated to continue pursuing these funds due to their potential for high returns, they added. Sebi, late last month, asked mutual fund houses to put in place a framework to safeguard the interest of investors, who invested in small and mid-cap funds amid the froth building up in the segments. This came in the backdrop of huge flow in the small and mid-cap schemes of mutual funds over the past few quarters.

Overall in 2023, mid-cap mutual fund schemes attracted nearly Rs 23,000 crore, while the same for small-cap schemes was at over Rs 41,000 crore. In 2022, mid-cap funds saw an inflow of Rs 20,550 crore and Rs 19,795 crore in small-cap funds. On the other hand, large-cap mutual funds experienced an outflow of nearly Rs 3,000 crore in 2023 and an inflow of Rs 7,281 crore in 2022. "Inflows have historically chased returns -- small and mid-cap funds -- in today's context. This phenomenon is expected to persist despite the warnings. "We aren't seeing any alarming redemptions in this space. Given the cash balance that small and mid-cap funds are sitting on and the SIP money that is flowing in every month, deep corrections are unlikely to happen soon unless triggered by some event," Jay Shah, Founder and CEO- Finwisor, said.

Typically, mid-caps and small-caps perform well in a high GDP growth environment, high flows in mutual funds, and a lower interest rate environment. Considering 2024 is an election year and markets are betting on large-cap, Niket Shah, Fund Manager at Motilal Oswal AMC, said there will be a consolidation in small and mid-cap segments in the short-term but investors will continue to pursue these funds for their potential for high returns and will not hesitate until there is a significant decline in stock prices. "We expect that GDP growth will continue to remain strong over the next five years given the government's focus on infra and catch up by private sector investments. We also expect flow in the mutual fund business, especially mid-caps, to remain strong," he added.

Shah manages Motilal Oswal Midcap Fund that completed 10 years recently and the fund has generated an AUM of close to Rs 8,490 crore. Over the past 5 years till calendar year 2022, mid-cap and small-cap have generated a return of 42 per cent and 71 per cent respectively. Finwisor's Shah suggested that investors who have invested in the small-cap and mid-cap funds purely on the basis of past returns, should start shifting their equity allocation to large-cap funds.

They should continue to invest in equities through SIPs (Systematic Investment Plans). Further, investors looking to invest in small and mid-cap funds should come with realistic return expectations (not expect the recent past return trajectory to continue), and be ready to face interim volatility, said Kaustubh Belapurkar, Director – Manager Research, Morningstar Investment Research India. Feroze Azeez, Deputy CEO at Anand Rathi Wealth, suggested investors consider a market cap mix of 50-60 per cent in large-cap and rest in mid-cap and small-cap. Ideally, investors should conduct portfolio review once every year.