Samvat 2075: MF investors' appetite for equity schemes sharply diminished

Staying put for the long-haul will mitigate volatility risks, say experts

Mutual fund (MF) investors’ appetite for equity schemes sharply diminished during Samvat 2075. Between October 2018 and September 2019, equity schemes garnered Rs 84,193 crore of inflows, which was about 40 per cent less than the previous Samvat.

According to industry experts, investors’ cut-back on equity schemes was caused by disappointment in mid- and small-cap funds, in which they had expected robust returns.

“Mid- and small-cap funds had attracted a significant chunk of investor flows, given they were expecting 30-40 per cent returns on these investments,” observed Kaustubh Belapurkar, director (fund research), Morningstar India.

However, both categories fell short of expectations. Mid-cap funds delivered returns of 4.4 per cent in Samvat 2075, while small-cap funds clocked negative returns of 3 per cent, shows data from Value Research.

Besides mid- and small-cap funds, large-cap schemes had a difficult time too. The mid-year study by S&P Indices Versus Active India Scorecard (SPIVA), showed that over 76 per cent of large-cap funds had underperformed their benchmark returns over a one-year period (as on June 28, 2019). The benchmark BSE100 gave returns of 9.8 per cent during the same period.

Even though mid- and small-cap funds underperformed in the recent year, fund managers believe this might be an opportune time to build positions in these schemes.

“For the next 6-12 months, investors may look at building up their positions. The divergence between the Nifty, and the mid- and small-cap indices is at historical extremes. Broader markets tend to outperform for 18-24 months after such extremes are reached,” said Pankaj Tibrewal, fund manager at Kotak Mutual Fund.

Analysts say the correction in the mid- and small-cap space has made valuations attractive. According to brokerages, the price-to-earnings multiple for mid-caps stands at a 13-15 per cent discount to large-cap stocks.

However, fund managers and advisors say a broader market rally might still be some time away, and investors would need to stay invested over the long term for desirable returns.

Jinesh Gopani, head (research), Axis AMC, said: “While the broader market is likely to remain volatile, our focus will remain on companies with well-defined niches and strong moats. We believe opportunities have emerged in mid- and small-caps after the steep corrections.”

“Over the longer term, the impact of volatility on these investments will even out,” added an advisor.

Data show that mid- and small-cap funds have outperformed large-cap schemes over both five-year and 10-year durations.

Over a five-year period, mid- and small-cap funds have given annualised returns of 9.75 per cent and 9.39 per cent, respectively. At the same time, large-cap funds have given annualised returns of 8.7 per cent. Over a ten-year period, mid and small-cap funds have given annualised returns of 13.8 per cent and 12 per cent, respectively, while large-cap funds have clocked 9.8 per cent.