Investors poured nearly Rs 12,000 crore into midcap and smallcap funds in July despite market weakness. Here's why

Economic Times

2 days ago

Synopsis
In July, mid-cap and small-cap funds saw record inflows despite elevated valuations and market caution. Experts warn of higher correction risks, urging staggered SIPs or STPs over lump sum investments. Conservative investors may wait, while disciplined allocation remains crucial for navigating volatility and maximising long-term potential in these segments.
ETMarkets.com Despite mid- and small-cap indices ending in the red in July, investor interest in these categories remained surprisingly strong, with nearly Rs 12,000 crore poured into them. According to the latest data from the Association of Mutual Funds in India (AMFI), mid-cap funds recorded a 38% surge in inflows, while small-cap funds saw an even sharper 61% jump compared to June.Experts attribute this surge to strong earnings growth, favourable economic indicators, and a notable rise in retail investor participation.'It is crucial for investors to strategically adjust their portfolio allocations based on their risk profiles. These categories should only make up a specific portion of their equity portfolios to avoid being overly exposed to current valuations, which can be high, especially for small-cap funds,' said Rajesh Minocha, Certified Financial Planner (CFP) and Founder of Financial Radiance, in an interaction with ETMutualFunds.
Also Read | Mutual fund SIP stoppage ratio slows down to 63% in July, SIP inflow hits record high of Rs 28,464 croreThe Nifty Midcap 100 – TRI and Nifty Midcap 150 – TRI fell 3.83% and 2.57%, respectively, in July. On the other hand, the Nifty Smallcap 100 – TRI and Nifty Smallcap 250 – TRI declined 5.61% and 3.37%, respectively, during the same period.
'Other than these, flows into other categories were quite similar. It appears investors are now allocating to all categories of equity MFs without too much bias towards a single category, though the tilt is still more towards smallcaps,' said Dr. Vikas Gupta, CEO & Chief Investment Strategist at OmniScience Capital.Gupta added, 'Indications are that investors are getting savvier and paying attention to the PE ratios of the indexes linked to different fund categories before allocating. If not, they should start considering this parameter. Of course, revenue and earnings growth expectations for these categories are also relevant but not easily accessible to retail investors.'In July, small-cap funds recorded the third-highest inflow among the 11 equity sub-categories, with Rs 6,484 crore, compared to Rs 4,024 crore in June. Mid-cap funds saw an inflow of Rs 5,182 crore in July, up from Rs 3,754 crore in June.These two categories have been witnessing a steady surge in inflows for the past two months. This resilience comes despite valuations in these segments already being elevated and market participants cautioning about possible volatility ahead.According to AMFI's monthly note, both mid-cap and small-cap funds recorded their highest-ever monthly inflows within their respective sub-categories.With this surge in inflows, the question arises: are there risks to be aware of, and should investors enter now or wait for a correction? Minocha responded that investors must recognise the inherent risks of high valuations, which significantly increase the chances of a sharp market correction in these segments. Additionally, mid-cap and small-cap funds carry higher liquidity risks compared to large-cap options.
Also Read | Simple, timeless dal-chawal solution: Radhika Gupta's take on Edelweiss Multi Asset Omni Fund of Fund 'Conservative investors should definitely consider waiting for a market correction, while aggressive investors should maintain disciplined exposure without falling into the trap of chasing the rally. Investors with a moderate risk profile should keep their portfolio mainly in flexi-cap and large & mid-cap type funds,' he further recommended.On the performance front, mid-cap funds on average lost 1.92% in July. There were 30 funds in the category, with Edelweiss Mid Cap Fund losing the most at around 3.78%, while Helios Mid Cap Fund delivered the highest positive return of 0.17%.During the same period, small-cap funds on average lost 1.23%. Out of 30 funds in this category, JM Small Cap Fund saw the steepest decline of around 3.25%, while PGIM India Small Cap Fund offered the highest positive return of around 0.92% in July.Given the negative and minimal positive returns, Minocha recommends that in the current environment, a staggered Systematic Investment Plan (SIP) is undoubtedly the superior choice, as it effectively minimises timing risk and balances out inherent market volatility.'Those with a lump sum amount can park the money in a liquid fund and then do a Systematic Transfer Plan (STP) into equity funds weekly. On the other hand, a lump sum investment at this stage carries a significant risk of short-term drawdowns in the event of a market correction.''Mid-caps and small-caps can provide higher returns in the long run, driven by the Indian growth story. However, near-term returns could be low due to stretched valuations. Selective investing and disciplined allocation will be key to navigating this phase successfully,' he added.One should always invest based on their risk appetite, investment horizon, and financial goals.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)