Large-cap mutual funds have witnessed two consecutive months of net outflows. Investors exited Rs 2,050 crore from the category in June 2023, while in May they exited Rs 1,362 crore, Association of Mutual Funds in India (AMFI) data showed. In the current calendar year so far, the inflows in the segment have been among the lowest in diversified equity mutual funds.

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Interestingly, this comes at a time when investors are chasing small-cap and mid-cap funds. In June 2023, small-cap funds, once again, recorded the highest inflow at Rs 5,472 crore versus Rs 3,283 crore in May 2023. The mid-cap fund inflow was recorded at Rs 1,749 crore as against Rs 1,196 crore in May.

Investors exiting large-cap category and flocking to small caps

According to Girish Lathkar, Co-Founder and Partner at Upwisery Private Wealth, investors have been betting on the depressed valuations in small caps and the prospects they offer.

"The small-cap index moved up sharply over the last few months prompting investors to increase allocations in small-cap funds. It's likely that investors booked profits from large-cap funds as the markets also were at a high in June.

Investors seem to have increased allocation to small-cap funds due to the recent rally in this segment," Lathkar told CNBC-TV18.

Benchmark indices Nifty 50 and S&P BSE Sensex have been trading at their all-time high levels recently. Sustained foreign fund inflows, the anticipation of a favourable earnings quarter coupled with improving economic conditions have propelled markets to perform well in the month gone by.

Additionally, several schemes in the large-cap fund category have underperformed their benchmark index over the last few years due to capital market's new categorisation norms. The Securities Exchange Board of India (SEBI) defines a large-cap company as those listed companies which are ranked from first to 100th company in the Indian stock exchanges in the terms of market capitalisation.

Here's a look at three, five and 10-year returns of large-cap funds:

(Source: Moneycontrol)

Bank for the buck?

Large-cap stocks should always remain part of the portfolio as an asset allocation, said Mukesh Kochar, National Head, Wealth, at AUM Capital.

"Investors can reduce or increase the allocation percentage as per prevailing market conditions. Those who want low volatility in return should increase their allocation to large-cap funds as these funds will be less volatile than mid-cap or small-cap funds. At this level of market, volatility will be high and hence this will protect investors from the high volatility of the portfolio. Therefore, investors should focus on large-cap funds to minimise risk and maximise returns in the current market conditions," Kochar said.

Going by the nature, large caps have the ability to deliver steady returns and tend to be less volatile. So, if an investor is looking for stable returns which are less volatile in nature, then large-cap funds are your preferred destination.

(Edited by : Shoma Bhattacharjee)