Smallcap fever lifts inflows into equity MFs despite redemption surge

Investors pump in record Rs 5,470 crore into smallcap schemes in June

Actively managed equity mutual fund (MF) schemes recorded net inflows of Rs. 8,600 crore in June, even as redemptions rose to a 29-month high of Rs. 29,404 crore, as some investors took money off the table, taking advantage of the buoyancy in the markets. 
 

The net inflow tally was amplified by investments into small-cap funds, which surpassed May collections figures to scale a record Rs. 5,470 crore, reveals latest data released by the Association of Mutual Funds in India (Amfi).
 

The strong inflows into small-cap funds pushed gross inflows into equity MF schemes to a three-month high of Rs. 38,040 crore, shows data. 
 

The industry believes canny investors were overhauling their portfolios in favour of small-cap funds.
 

“The flows into small-cap funds are at an all-time high. Investors seem to be rotating funds, withdrawing from large-cap schemes and investing the proceeds in small-cap funds. They are probably seeing the potential of higher gains in small-caps,” says N S Venkatesh, chief executive officer, Amfi.
 

Investors have remained net sellers of large-cap schemes for two consecutive months amid a rally in the equity market. In June, they pulled out a net Rs. 2,050 crore.
 

The rush of money into small-cap schemes has led to difficulties for fund managers.
 

In July, two fund houses — Tata MF and Nippon India MF — stopped taking lump sum inflows into their small-cap schemes, citing deployment challenges amid rising small-cap valuations.
 

According to a report by ICICI Securities, the small-cap index has jumped 24 per cent since the end of March. In the same period, the mid-cap index has gone up 22 per cent; the large-cap-focused National Stock Exchange Nifty50 Index has risen 14 per cent.

“Both the small- and the mid-cap indices surged during the month. Investors have been consistently investing in both these categories for some years. The last time these categories witnessed net outflows was in February 2021 for mid-caps and September 2021 for small-caps,” observes Melvyn Santarita, analyst-manager research, Morningstar India.
 

Overall, the net inflows into active equity schemes have remained on the lower side in the past three months. While gross inflows are in line with the 2022-23 (FY23) average, the average monthly outflow is nearly 30 per cent higher at Rs. 25,300 crore so far this financial year (2023-24, or FY24) owing to profit-booking in active equity schemes. As a result, the deployment of funds by MFs in the equity market has been markedly lower in three months. 
 

The total investments made by equity MFs during the first three months of FY24 is at just Rs. 2,980 crore, compared with an average monthly investment of Rs. 14,500 crore in FY23, shows data from the Securities and Exchange Board of India.
 

Inflows remain elusive for most debt schemes, with seven of 16 fund categories witnessing new outflows in June.
 

Liquid schemes, which see outflows in the last month of almost every quarter mostly due to redemptions by corporates to pay advance taxes, recorded net outflows of Rs. 28,545 crore. Index funds, including both equity and debt, also ended the month in the negative, with investors pulling out Rs. 906 crore.
 

The total assets under management (AUM) of the MF industry added over Rs. 1 trillion to touch a new high of Rs. 44.4 trillion. The rise in AUM was mostly due to the equity market rally as overall flows, including those into equity, debt, hybrid, and passive schemes, came in at a negative Rs. 2,022 crore in June.
 

Retail investors account for more than half of the MF industry AUM, with their share at Rs. 23 trillion in June.
 

The total number of MF investment accounts, known as folios, stood at 149 million at the end of last month, while total systematic investment plan accounts rose to 66.5 million.