Outflow from smallcap funds for first time in 30 months due to rebalancing

Rs 22,600 crore inflow in equity schemes, despite 16% MoM decline

Smallcap mutual funds recorded net outflows for the first time in 30 months in March as investors pulled out money after the markets regulator, the Securities and Exchange Board of India (Sebi), warned against “froth” in the mid and smallcap space.

Active equity mutual fund (MF) schemes raked in Rs 22,600 crore in March. The March inflow is 16 per cent lower than the two-year high inflow of Rs 26,860 crore in February, shows data from the Association of Mutual Funds in India (Amfi). The inflows were supported by the Rs 19,270 crore gross inflows through the systematic investment plan (SIP) route.

According to MF executives, the outflow from smallcap funds could be due to portfolio rebalancing.

"Rising market led to profit booking by investors while SIPs continue to be encouraging. We witnessed investment rebalancing where investors seem to have moved from smallcap schemes to largecap," said Manish Mehta, National Head - Sales, Marketing & Digital Business, Kotak Mahindra AMC.

Largecap and flexicap schemes have seen a surge in inflows in the past three months amid declining interest in smallcap and midcap funds, which were raking in the bulk of the flows in 2023 (CY23). The flows dipped after Sebi and Amfi asked mutual funds to take steps to ensure investors are protected from the froth, which was building up in the small and midcap segment.

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"While till February, equity inflows predominantly favored mid and smallcap funds, we have seen a slight halt in March. Many investors gravitated towards smallcap funds, driven by high return prospects, however, a disproportionate allocation to such funds can be risky in the long run," said Swarup Anand Mohanty, Vice Chairman and CEO, Mirae Asset Investment Managers.

Largecap and flexicap schemes, the two of the lower risk equity offerings, raked in Rs 12,134 crore in CY24 vis-a-vis Rs 10,970 crore tally of midcap and smallcap schemes.

Passive schemes also ended the financial year 2023-24 (FY24) with strong inflows. Exchange traded funds (ETFs), excluding gold ETFs, raked in a net of Rs 12,800 crore, the highest since September 2022. Inflows into hybrid funds moderated vis-a-vis February at Rs 5,584 crore.

However, at the industry level, the outflows far outweighed the inflows owing to nearly Rs 2 trillion net outflows from debt-oriented schemes. The aggregate outflow of Rs 1.6 trillion and mark-to-mark losses in the midcap and smallcap schemes led to a 2 per cent month-on-month (M-o-M) decline in assets under management (AUM) at Rs 53.4 trillion..