Small-Cap Funds: A major attraction for India’s retail investors this year

The craze of Indian retail individual investors for investing in the small-cap category is never-ending. Investors are investing in actively managed small-cap funds as they look to ride the ongoing rally. However, since some of these funds have already gone up a lot in value, financial experts are advising investors to consider spreading their investments over time instead of putting all their money in at once.

In August, more people invested in small-cap mutual fund schemes than in large-cap and mid-cap funds, according to data from AMFI. Now, the only category with more individual investors than small-cap schemes is equity-linked savings schemes, which are popular because they offer tax benefits.

Furthermore, the number of accounts in small-cap schemes increased by more than 55% since August of the previous year, marking the most significant rise in any scheme category. The increase in the number of folios has been accompanied by higher inflows into these schemes.

Monthly inflows

Upon observing the data above, it is evident that there is a negative inflow in the large-cap category, indicating that investors have withdrawn more money from large-cap investments than they have put in. In contrast, the mid-cap category has experienced consistent monthly inflows since the beginning of this year.

However, the small-cap category stands out as the most attractive, having attracted a total inflow of Rs 26,305 crore, approximately twice the inflow of the mid-cap category. According to the data, over the past three months, inflows into the small-cap category have consistently and significantly increased.

The NSE Small Cap index has surged from 8,857 levels on April 3, the beginning of this financial year, to 12,036 at today’s closing, representing a 36% return during this period. Moreover, it reached an all-time high of 12,573 on September 12 and is currently trading at a 4.3% discount.

If we compare this return with the Nifty50 index, it clearly outperforms the Nifty50, which has generated only a 13.5% return during the same period. This difference in returns may also be a significant reason for the growing attraction towards small-cap funds.

From the start of the financial year, no scheme has managed to outperform its corresponding benchmark index, as per data from AMFI. However, small-cap funds have a track record of surpassing their benchmarks, fund managers are currently facing challenges in replicating those results amid the ongoing market surge. The reasons for this underperformance may include high valuations in the small-cap segment and the limited availability of freely traded small-cap stocks.

Due to the significant increase in inflows into this category, several fund houses have temporarily halted the option to invest a lump sum amount. Tata Mutual Fund was the first to take this action.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.