MF trends: Small-caps take a hit, investors bit on large and mid-cap funds

The Rs 53.4 lakh crore mutual fund industry witnessed outflows of nearly Rs 1.6 lakh crore in March 2024, led by debt funds.

Debt mutual funds saw the maximum outflows in March, with a total of Rs 1.98 lakh crore being withdrawn. Liquid funds, which are a type of debt fund that can be easily converted to cash, had the highest outflows of Rs 1.57 lakh crore.

The amount of money invested in equity mutual funds decreased by 16% in March 2024, totaling Rs 22,633.15 crore. Sectoral/thematic funds were the most popular type of equity fund, with Rs 7,917.72 crore invested. However, smallcap funds experienced outflows of Rs 94.17 crore.

"Total inflows into mutual fund industry fell by Rs1.59 lakh crore on the back of quarter ending advance tax payments, regular redemptions from debt funds and higher valuations in mid and small cap space. Net flows into debt funds were negative at Rs.1.98 lakh crore, while equity funds garnered Rs.22,633 crore, with Rs.5584 crore by hybrid funds," said Gopal Kavalireddi, Vice President of Research at FYERS. 

Business Standard decodes the March numbers for you: 

Sharp reversal: Liquid funds, known for their high liquidity and low risk, saw a dramatic turnaround. Investors pulled out a staggering Rs 157,970 crore after pouring in Rs 83,642 crore in February. This is the biggest shift in trend for this category. 

Overall, debt-oriented schemes experienced net outflows of Rs 198,298 crore, a stark contrast to the Rs 63,808 crore inflow in February.

Only Long Duration Funds and Gilt Funds with a 10-year maturity bucked the trend, attracting inflows of Rs 772 crore and Rs 58 crore respectively.

From the debt-oriented schemes, liquid funds saw the highest net outflows at Rs.1.58 lakh crore, trailed by ultra-short duration funds at Rs 9,135 crore and money market funds at Rs.8,720 crore. Barring long duration funds and gilt funds with 10-year constant duration, the remaining  14 categories witnessed net outflows. The assets under management of the debt category ended the month at Rs.12.62 lakh crore, down by 12.9 per cent on a m-o-m basis.

"The huge net outflow in March could be attributed to the advance tax requirement that corporates need to meet with it being quarter end as well as financial year end. The outflows were more broad based with all the categories except for three witnessing net outflows. Long Duration Fund, Banking and PSU Fund and Gilt Fund with 10-year constant duration were the three categories which witnessed net inflows.

Categories such as Long Duration Fund and Gilt Fund with 10-year constant duration, which houses funds that tend to maintain higher maturity profile, found favor among investors. The flow trend in these segments suggests that investors have preemptively started to show interest in funds from these categories, largely driven by expectation of interest rate cut in the later part this year. This could have also led investors to liquidate some of their investments from categories having shorter duration profile such as Ultra Short Duration, Low Duration and Money Market Fund," said Himanshu Srivastava, Associate Director – Manager Research, Morningstar Investment Research India Private Limited.

Equity funds:

Meanwhile, inflows in equity funds which have remained in the positive territory for 37 months have witnessed some interesting trends. Sequentially they declined by 15.8% while increasing by 10.2% on a yearly basis. 

The large cap funds inflows saw a significant boost. However small cap funds witnessed outflows after 30 months since some of the mutual funds put in restrictions to limit fresh inflows into those funds as well due to market concerns due to frothy valuations and results of stress tests. This could also be attributed to some profit booking and rebalancing (reducing small cap exposure while increasing large cap exposure) by investors.”

"The net inflows witnessed in March 2024 was lower by 15.7% than the net flows seen in February 2024 (INR 26,865.7 crores). The equity segment was also aided by 5 new fund launches during the month which cumulatively garnered Rs 3,074 crore. All these new launches belonged to the Sectoral/Thematic category (Baroda BNP Paribas Innovation Fund, Canara Robeco Manufacturing Fund, Edelweiss Technology Fund, Kotak Technology Fund and Union Business Cycle Fund)," said Melvyn Santarita, Analyst,  Morningstar Investment Research India Private Limited.

Among the equity asset class, the Sectoral/Thematic Funds category saw the highest inflows to the tune of Rs 7,917.7 crore, also aided by the 5 new launches during the month of March 2024.

Why did small-cap funds witness outflows?

The small cap category witnessed net outflows of Rs 94 crore in March 2024. It was the only equity category which witnessed net outflows in March 2024. 

"The last time this category saw net outflows was back in September 2021. Similarly, in the mid cap category too, net investments dipped in March 2024 to Rs 1,017.6 crore, down from Rs 1,808.1 crore. Favorable market conditions over the last couple of years saw investors getting high returns in these segments and consequently, investors have also flocked to these categories with ever increasing flows," said Santarita.

However, recently, SEBI had mandated AMCs to disclose the stress test results for the midcap and small cap funds every 15 days. The purpose of the stress test was to ascertain how soon fund managers can liquidate their portfolios if investors were to rush for redemptions under adverse market conditions. This has possibly led to some concerns among investors. Additionally, some found houses have also opted to stop lumpsum investments and keep only the SIP/STP/Switch option open for further investments in their small and mid-cap funds. This approach could be possibly due to concerns regarding high valuation in these segments. But both these reasons have culminated into these categories witnessing sharp dip in net inflows.

The Large and Midcap category saw the second highest flows during the month among the equity categories- Rs 3,215.5 crore, followed by the flexi cap category which witnessed net inflows of Rs 2,738 crore. and large cap category which witnessed net inflows of Rs 2,127.7 crore. 

"It is interesting to note that whilst net flows in mid and small cap saw a dip, categories which are biased towards the large cap categories saw robust flows. This could be potentially due to investors choosing to rebalance their portfolios and re-investing in large cap segment where the valuations are relatively more reasonable than the mid cap and small cap counterparts," said Santarita.

Hybrid and New Fund Offerings (NFOs) on the Decline

Hybrid schemes saw net inflows of only Rs 5,584 crore, a 69 per cent fall from the Rs 18,105 crore in February. 

"With strong moves in commodities, real estate and equity markets, investors continue to opt for multi-asset allocation funds, pouring in Rs.2,681 crore in March. The AUM of the hybrid schemes category was at Rs 7.22 lakh crore," said Kavalireddi.

New fund offerings (NFOs) were also on the downtrend, mobilizing only Rs 4146 crore from 21 schemes. Sectoral and thematic funds dominated NFO launches.

SIPs Continue Strong Growth

Despite the overall shift in investor sentiment, Systematic Investment Plans (SIPs) continued their upward trend. The monthly SIP inflow stood at Rs 19,270 crore, maintaining the momentum observed throughout FY24. Total SIP contribution reached Rs 1.99 trillion, reflecting a healthy 27.7% increase compared to the previous year.

Systematic Investment Plan (SIP) monthly inflows stood at Rs 19,270 crore, continuing the strong inflow exhibited since the beginning of FY24. Total SIP contribution stood at Rs 1.99 lakh crore, an uptick of 27.7 per cent over the previous year.

Gold ETFs See Lower Inflows

Gold Exchange Traded Funds (ETFs) witnessed a decline in inflows, with investors contributing Rs 373 crore compared to Rs 997 crore in February. However, gold continues to be seen as a safe haven investment, especially considering ongoing geopolitical tensions and elevated inflation.