The uptick in the broader markets has revived risk-appetite among mutual fund (MF) investors, with the industry seeing a 75 per cent jump in equity flows month-on-month (MoM) in January. Mid- and small-cap schemes garnered over one-third of the flows.
Investor flows to small- and mid-cap funds improved 154 per cent and 126 per cent, respectively, over the previous month. Small-cap funds garnered Rs 1,072 crore in January, while mid-cap funds collected Rs 1,798 crore. Overall, equity flows stood at Rs 7,877 crore.
Fund managers have been bullish on a broader market recovery, but say economic recovery will be a key factor to watch out for.
Mid- and small-caps were trading at large discount to large-caps in valuation terms. In recent months, some of the discounts have moderated. However, a runaway rally could be challenging unless economic recovery starts to play out,” said Rahul Singh, chief investment officer of Tata MF.
The asset size of the MF industry at the end of January stood at Rs 27.85 trillion, which was a new high. Meanwhile, flows through systematic investment plans (the monthly investment facility, also known as SIPs) improved marginally to Rs 8,532 crore, which was a new high.
Both mid- and small-cap schemes have outperformed large-caps in recent months. In the trailing three-month period, mid- and small-cap schemes have delivered returns of 9.5 per cent on average, whereas large-cap schemes have returned little over 1 per cent.
Over the same period, the frontline indices — Sensex and Nifty — have given returns of 1.6 per cent and 1 per cent, far lagging broader indices, such as the BSE Midcap and the BSE Smallcap, which have yielded returns of 7.1 per cent and 9.7 per cent, respectively.
In January, the overall gross equity flows improved 9.4 per cent, while the redemptions eased by nearly the same margin.
According to industry participants, mid- and small-cap schemes can continue to see robust traction. “We can see investor flows coming into mid- and small-cap schemes if the broader markets continue to hold up,” said Radhika Gupta, chief executive officer of Edelweiss AMC.
“While small-cap funds have not been in flavour during the last few months, the recent market rally seems to have driven the inflows into small- and mid-cap funds. As a result, the assets under management for small-caps has seen the biggest jump in the last nine months,” said Sundeep Sikka, executive director and chief executive officer of Nippon Life India AMC.
On the debt side, investor flows stood at Rs 1.09 trillion, contributed largely by liquid and overnight schemes. For liquid schemes, the investor flows stood at Rs 59,682 crore, while overnight schemes garnered flows to the tune of Rs 22,652 crore.
Among other debt categories, ultra-short duration schemes attracted Rs 8,152 crore of flows. This was followed by low-duration (Rs 5,562 crore), money market fund (Rs 6,989 crore) and banking and PSU fund (Rs 3,032 crore).
Experts say with bank deposit rates staying flat, investors could be possibly looking for higher returns in some of these duration products.
Credit risk funds continued to see investor outflows. In January, investors pulled out Rs 1,214 crore from these schemes.
“Investors are looking at the schemes where the quality of underlying debt papers are expected to be on the higher side and credit risks are expected to be low,” said a fund manager.
Industry players say overnight schemes can scale up in the coming months. “With the introduction of exit load in liquid funds and additional restrictions, which will come into effect from April 1, 2020, we expect this trend to continue,” said G Pradeepkumar, chief executive officer at Union AMC.
At the beginning of the current financial year, overnight schemes accounted for Rs 11,309 crore of investor assets. At the end of January, the size of the category stood at Rs 54,578 crore; a fivefold rise.
At the end of January, equity assets stood at Rs 7.89 trillion, while assets managed by debt schemes stood at Rs 12.41 trillion.