Smallcap pie grows as retail investor faith soars, shows Capitaline data

Mutual funds' average holding in Smallcap 250 Index companies peaks at 9.26%

Retail investors now own a bigger slice of smallcap companies than at the start of 2023–24 (FY24), underscoring their growing conviction about investing in this red-hot space.

Data from Capitaline shows mutual funds’ (MFs’) average holding in the National Stock Exchange Nifty Smallcap 250 rising to 9.26 per cent from 8.67 per cent during the first six months of FY24, with the number of companies with over 20 per cent MF holdings increasing from 24 to 28.

In comparison, MF holdings in Nifty50 companies have gone up only marginally, from 9.67 per cent to 9.75 per cent.

This year’s rise in MF ownership in smallcaps is significant, considering that the average ownership rose only by 1 percentage point between March 2021 and March 2023.

Smallcap schemes have seen record inflows in FY24, largely on the back of their superior performance compared to other schemes.

In the first seven months of the ongoing financial year, smallcap schemes have accounted for one-third of the total net inflows into equity schemes. They have garnered a net of Rs 25,500 crore during the seven-month period.

At present, smallcap funds are at the top of the returns chart across time frames.

On average, these schemes have delivered a 36 per cent return in one year and a 35 per cent annualised return in the three-year period.

While active smallcap funds make up the bulk of the buying in this space, some money also flows into the smallcap space from other equity-oriented and hybrid schemes.

In recent months, analysts and MF executives have voiced their concerns over the growing interest in smallcap stocks despite higher valuations.

A couple of fund houses have stopped taking lump sum inflows, citing deployment challenges.

“After the sharp run-up in markets in recent months, we are cautious about the near-term return potential of the equity markets. Midcaps and smallcaps, in general, have become more expensive after the recent run-up. Weak (low growth and low quality) midcaps and smallcaps are in a bubble zone, and caution is advised,” said Vinay Paharia, chief investment officer (CIO), PGIM India MF.

However, opportunities are still there for long-term investors, provided they invest in better-quality midcap and smallcap companies with high growth potential, Paharia said.

According to Mihir Vora, CIO at TRUST MF, although the opportunities have shrunk in the past year, the presence of a large number of companies in the smallcap space means there is always scope for stock picking.

“Smallcaps are a large space and hence difficult to make a generic statement. Although opportunities have come down after the recent run-up, there’s enough room for stock picking. Also, you have no option but to invest in smallcap stocks if you get into emerging segments like defence, electronics, and railway capital expenditure,” he said.

The surge in demand for smallcap funds is leading to more scheme launches in the space.

Last week, two fund houses launched smallcap schemes. While Motilal Oswal MF came out with an active fund, DSP MF launched a passive fund that would track the Nifty Smallcap250 Quality 50 Index.

According to a report by Nuvama Alternative & Quantitative Research, Blue Star, Emami, Krishna Institute, Chola Financial Holdings, and CreditAccess Grameen were the top MF holdings in the smallcap space at the end of October.

MF stakeholding-wise, Kalpataru Projects International, Equitas Small Finance Bank, and Multi Commodity Exchange top the list.