Mutual Fund Frenzy: Small-Caps Stage a Comeback as Investors Embrace Diversification
MAS Team | 15 May 2024
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In a remarkable turnaround, the mutual fund industry witnessed a refreshing change in April as small-cap funds staged a remarkable comeback, attracting net inflows of Rs2,208 crore. This resurgence put to rest worries of a potential reversal after small-cap funds experienced a net outflow of Rs94.2 crore in March, breaking a streak spanning two-and-a-half years.
 
Joining the party, large-cap funds also recorded inflows of Rs349 crore during the same period, reflecting a distinct attraction toward SMID (small and mid-cap) schemes among investors. Both small-cap and mid-cap schemes saw notable inflows, underscoring the importance of maintaining a 3-5 year investment horizon to mitigate potential setbacks due to elevated valuations.
 
Experts are bullish about the potential for decent earnings growth among small and mid-cap firms, buoyed by promising growth opportunities in manufacturing, logistics, and supply chain, aided by initiatives like Make in India and production-linked incentive schemes. They anticipate a favorable risk-reward ratio for the broader market, driven by sustained earnings growth over the next five years.
 
Despite the impressive comeback, a section of experts suggests that some consolidation may be necessary to ensure the market is on a healthy trajectory.
 
Equity Mutual Fund Inflows Remain Resilient While data from the Association of Mutual Funds in India (AMFI) showed a 16.4% decline in equity mutual fund inflows in April, totaling Rs18,917 crore compared to Rs22,633 crore the previous month, inflows into equity funds remained positive for the 38th consecutive month. Although the inflows slowed compared to previous months, the fluctuations are not unexpected, and there has been a subtle shift among investors following stress test results and a newfound sense of confidence due to greater transparency and assurances of well-managed funds.
 
Systematic Investment Plans (SIPs) propel growth one reason for the robust equity inflows is the contributions from systematic investment plans (SIPs), which stood at an all-time high of Rs20,371 crore in April, against Rs19,270 crore in March. In April, the number of SIP accounts reached a new high of 8,70,11,401, surpassing March's count of 8,39,71,299. Assets under management (AUM) of SIPs also reached an all-time high of Rs11,26,128.67 crore, compared to Rs10,71,665 crore in March.
 
Record-Breaking Folios and AUM Mutual fund folios hit a record of 18,14,68,286, while retail mutual fund folios, comprising equity, hybrid, and solution-oriented schemes, stood at a record high of 14,53,57,892 in April, compared to 14,24,42,823 in March. Retail AUM was at Rs32,82,225 crore in April.
 
Industry Growth and KYC Compliance In April, mutual funds AUM rose by 7% to Rs56.99 trillion, against Rs53.12 trillion in the previous month. Additionally, only nine open-ended New Fund Offers were floated, mobilizing around Rs1,532 crore.
 
Regarding KYC compliance, 93% of mutual fund accounts had either validated or registered Know Your Customer (KYC) status, while only 3% of the accounts were currently on 'KYC Hold' status. The industry is committed to facilitating a seamless KYC validation process, ensuring integrity and accessibility of mutual fund investments across the board.
 
As investors embrace diversification and the industry continues to grow, experts advise that diversified funds would be a better bet for long-term investments compared to sectoral or thematic funds, especially if valuations are on the higher side.