Dilemma for investors as large-caps pip smaller stocks in August

Over the past month, mid-cap and small-cap funds have given average returns of 4.9% and 3.5%, respectively

Returns of small- and mid-cap-oriented schemes fell below those of large-caps for the first time this year, in August. This may prompt investors to further reallocate funds to large-cap schemes. 

Given the divergent market performance and lofty valuations across the board, investors appear to be torn between large-cap and smaller-cap schemes. Some experts are of the view that the correction in the broader market can be used as a buying opportunity by investors having a high-risk appetite. There is an opportunity to generate alphas in the small- and mid-cap category from a long-term perspective, they add.

Over the past month, mid-cap and small-cap funds have given average returns of 4.9 per cent and 3.5 per cent, respectively; on the other hand, large-cap funds have given average returns of 7 per cent, the data provided by Value Research shows.

Because of the correction in the small-cap segment in August, investors pulled out money from related schemes. The data from the Association of Mutual Funds in India (Amfi) shows that small-cap funds witnessed net outflows of Rs 163 crore in August, even as large- and mid-cap funds and mid-cap funds saw inflows of Rs 451 crore and Rs 162 crore, respectively.

“Outflows in small-caps are in line with valuations in this space going higher; greater inflows in dynamic asset allocation are in the right direction as investors are indecisive about allocating capital in pure equity strategy. A valuation-driven strategy in equity allocation is a better strategy,” said Tarun Birani, founder & CEO, TBNG Capital Advisor.

Many fund managers see this as a good opportunity to build robust portfolios, given stronger cash flows among many mid-caps and small-cap companies and reasonable valuations after the correction. “We strongly believe the earning trajectory will remain strong for the next few years. Coupled with low leverage in the system, this should help generate good long-term returns. Even after the recovery rally over the past year or so, small-cap index continues to underperform large-cap index on 3- and 5-years bases which suggests that there is still headroom for the rally to continue on the back of continued economic recovery,” said Aniruddha Naha, senior fund manager-equity, PGIM India Mutual Fund in a note.

Despite last month’s blip, returns for the broader market remain attractive over a one-year period. Over the past year, mid- and small-cap funds have given average returns of 74 per cent and 91 per cent. respectively. Large-cap funds have given returns of nearly 56 per cent in the same period.

Market experts said if global investor sentiment remains strong and the US central bank continues to be supportive, investors will once again look at investing in small-cap funds.