The small-cap funds have been making headlines lately with a remarkable surge in investments. According to Association of Mutual Funds in India (AMFI) data, these funds received an inflow of ₹4,495 crore in October, a substantial increase from the previous month's ₹2,678 crore.

Live TV

Loading...

The small-cap category's Average Assets Under Management (AAUM) also exceeded ₹2 lakh crore for the first time, underlining the growing interest in this segment of the market.

But the most striking development unfolded in the large-cap category. After facing six consecutive months of outflows, large-cap funds finally saw a positive inflow of ₹724 crore in October. This turnaround signals a renewed investor confidence in well-established companies, marking a pivotal shift in market dynamics.

What triggered the surge?

Several factors have contributed to the surge in small-cap investments. The consistent upward trend in the Nifty Small-Cap index since April 2023 reflects bullish momentum and increasing retail investor interest in these high-volatility, growth-focused segments of the market. Investors have been diversifying their portfolios by turning their attention to small-cap stocks, especially as India's large-cap indices have shown signs of decent returns.

According to Melvyn Santarita, an Analyst at Morningstar Investment Adviser India, "While the flows in this category have been consistently high over the past many months, in October, it was also aided by the launch of Baroda BNP Paribas Small Cap Fund, which garnered ₹1,103 crore."

The second-highest net inflows were seen in the sectoral/thematic funds category, which received ₹3,896.7 crore. HDFC Pharma and Healthcare Fund and UTI Innovation Fund, belonging to this category, cumulatively garnered ₹918 crore during their New Fund Offer (NFO) period.

Both the small-cap and mid-cap categories bounced back with robust net inflows in October after a dip in September. The mid-cap category received its second-highest net flows in terms of quantum over a monthly period at ₹2,408.9 crore.

Similarly, the small-cap category saw its second-highest net inflows in the month of October at ₹4,495 crore, aided by the launch of a new fund.

Investment considerations

Investors are urged to consider the cyclical nature of the market and the potential for role reversals in the coming months. While small- and mid-cap stocks have outperformed large-cap stocks recently, they are also riskier and more volatile, subject to larger price swings both upward and downward.

Anurag Jhanwar, Partner, and Co-founder of Upwisery Private Wealth, acknowledges the potential for higher long-term returns with small and mid-cap stocks but cautions about the associated risks. He suggests that the allocation toward these asset classes is likely to increase in the future.

"Due to the illiquid nature of small caps, investors are advised to exercise patience and avoid chasing stocks to prevent driving up prices," he told CNBC-TV18.com.

As per Santarita, investors should note that while both the midcap and small-cap categories have the potential to deliver good returns, these categories inherently are volatile with sharp drawdown risks. Therefore, investors should have a long-term time horizon while investing in these categories. Opting to invest in these categories via the Systematic Investment Plan (SIP) route is a wise strategy for riding the volatility while cost averaging over extended periods.

(Edited by : Amrita)

First Published:Nov 9, 2023 4:36 PM IST