 "mutual fund equity market")
Retail investors now own a larger share of smallcap companies than they did a year ago, thanks to their conviction in mutual fund (MF) schemes focused on this segment.
Data from Capitaline shows that MFs’ average holding in the National Stock Exchange Nifty Smallcap 250 Index stood at 9 per cent at the end of the October-December quarter of 2023-24 (FY24), up from 7.76 per cent in the same quarter of 2022-23.
During this period, the number of companies with over 20 per cent MF holdings rose from 20 to 26. Market observers indicate that early trends suggest further increases in ownership during the January-March quarter of FY24.
The growing MF pie in small and midcap stock ownership has raised regulatory concerns regarding liquidity. Earlier this year, the Securities and Exchange Board of India urged fund houses to stress-test their schemes to ascertain their ability to manage sudden surges in redemptions.
According to MF executives, there were concerns that the substantial free float ownership of smallcap stocks by MFs could lead to liquidity issues during market downturns.
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In the calendar year 2023, small and midcap schemes accounted for 40 per cent of the total net inflows into active equity schemes, receiving Rs 64,000 crore of the total inflow of Rs 1.6 trillion. These flows were driven by improved performance, with the Nifty Midcap 100 and the Nifty Smallcap 100 gaining 46.6 per cent and 55.6 per cent, respectively, in 2023, more than double the rally seen in the Sensex and Nifty 50 indices.
However, inflows into small and midcap funds have moderated in the past two months. In January, combined flows into largecap and flexicap funds surpassed those into smallcap funds for the first time in 17 months, due to a decline in smallcap fund inflows and a surge in investments into the two largecap-oriented schemes.
A similar trend was observed in February.
Fund managers and wealth managers advise that while there’s no need to completely avoid smallcap funds, investors should rebalance their portfolios to restore exposure to desired levels after the skewed rally.
“In times like these, it is crucial for investors to ensure their asset allocation is appropriate. If the recent rally has skewed their portfolio exposure in any category, it’s advisable to rebalance accordingly,” Sailesh Raj Bhan, chief investment officer of equities at Nippon India MF said in an interview last week.
