₹1,322 cr outflows in largecap funds: What does this mean for investors?

Largecap funds, usually seen as a relatively stable category during market volatility, appear to be losing some investor confidence.

 

According to data from the Association of Mutual Funds in India (Amfi), investors pulled out ₹1,321.69 crore from largecap funds in July. This was the first monthly outflow from the category in nearly three years. In June, largecap funds had received inflows of ₹2,067.48 crore.

 

The outflow came even as the Nifty 50 rose 2 per cent in July, supported by a sharp rally in information technology stocks, which recorded their best monthly gain in six years. The broader market, however, remained range-bound.

 

 

Before July, the largecap category had not seen a monthly outflow for a long period. Earlier, the category had recorded outflows of about ₹110 crore in September 2023 and ₹280 crore in December 2023, according to Amfi data.

 

The development has raised a key question for investors: should they stay invested in largecap funds amid the current weakness, or book profits and move out?

Profit booking or panic?

The outflow from largecap funds appears to be driven not just by profit booking but also by portfolio reallocation, experts said. Weak performance and lack of alpha have tested investor patience.

 

Mohit Gang, managing director and chief executive officer, Moneyfront, said the outflow from largecap funds was mainly due to profit booking and tactical portfolio reallocation, rather than broader fear about the market.

 

Juzer Gabajiwala, director, Ventura, said largecap funds had seen net redemption after a long time. “This clearly indicates that investor patience with largecap funds is wearing thin. These funds have delivered limited performance and have not generated meaningful alpha,” he said.

Why is money moving to mid- and small-cap funds?

Investor preference appears to be shifting towards mid-cap and small-cap funds. Experts, however, said this should not be read as a complete loss of confidence in largecap stocks. It is more a sign of tactical rebalancing across equity categories.

 

Pankaj Mathpal, founder, Optima Money, said largecap valuations were currently better than those of mid- and small-cap stocks. However, mid- and small-cap funds had outperformed largecap funds over the past year, prompting investors to show greater interest in those categories.

 

Gang said investors were moving towards segments that had delivered better recent performance. Money was being shifted from largecap funds to mid-cap and small-cap funds. Some capital was also moving to hybrid, arbitrage and fixed-income products as investors looked to lock in returns with lower volatility.

 

Gabajiwala said the shift towards mid- and small-cap funds was clear. Investments in small-cap funds had crossed ₹7,500 crore, and the category had attracted the highest inflows over the past year. Mid-cap funds were also catching up. More than half of total inflows were going into mid- and small-cap segments, he said.

 

Gang, however, said the outflow from largecap funds should not be seen as investors completely moving away from blue-chip stocks. Despite fund-level outflows, investors continue to get exposure to largecap stocks through passive exchange-traded funds and flexi-cap funds. The current trend, therefore, is better viewed as portfolio rebalancing across equity categories.

How strong is the largecap outlook?

Experts remain balanced on the short-term technical and fundamental outlook for largecap funds, but are positive over the long term. While near-term returns may remain range-bound and earnings growth could face pressure, strong macro fundamentals and reasonable valuations support the long-term case.

 

Abhinav H Sharma, fund manager, Tata Asset Management Company, said largecap stocks looked attractive from a risk-reward perspective after nearly two years of time correction.

 

“Several largecap sectors are trading around or below their long-term average valuations,” Sharma said.

 

He said Q1FY27 results showed that earnings per share growth was improving across sectors. In addition, the earnings growth gap with other emerging markets was expected to narrow in FY28, which could renew interest from foreign portfolio investors. The short-term as well as long-term fundamental outlook for largecap stocks, therefore, remained strong, he said.

 

Gang said largecap stocks could remain range-bound in the short term. Selling by institutional investors may cap upside, though steady domestic systematic investment plan inflows were providing strong support to the market.

 

On the fundamental side, near-term earnings growth is likely to remain moderate. Elevated global interest rates and macroeconomic challenges are affecting sectors such as banking and information technology.

 

Over the long term, however, the outlook for largecap stocks remains strong, Gang said. Over the next three to five years, largecap companies could see structural strength as they usually lead during sustained market expansion.

 

India’s strong macro fundamentals — healthy foreign exchange reserves, continued surplus in services trade, stable domestic consumption and ongoing government reforms — are supporting the economy, he said. Largecap companies with strong market positions and clean balance sheets are well placed to benefit from this economic strength.

Are largecap valuations attractive?

Despite the outflow from largecap funds, experts remain positive on valuations. Compared with mid- and small-cap stocks, largecap stocks offer a better margin of safety, they said.

 

Sharma said the Nifty 50 was trading at about 18 times one-year forward earnings per share, close to its 10-year average. This made largecap valuations reasonably attractive.

 

Mathpal said valuations could not be called very attractive, but they were comfortable and favourable for investment.

 

Gang said mid-cap and small-cap indices were trading at price-to-earnings multiples of more than 30 times and 34.2 times, respectively. Compared with these segments, largecap stocks offer investors a much higher margin of safety, he said.

What should investors do?

Experts said existing investors need not exit largecap funds only because of recent underperformance. Investors with a long-term horizon may continue their systematic investment plans and deploy fresh money in a staggered manner.

 

Sharma said investors should continue investing systematically in line with their risk appetite. Trying to time the market is not advisable, he said. Profit booking should be done only if it is aligned with the investor’s financial goals.

 

Gang advised existing investors to maintain their positions in largecap funds and continue systematic investment plans. Exiting core holdings only to participate in the rally in small-cap stocks would not be the right strategy, he said.

 

For fresh investments, largecap or flexi-cap funds may be preferred, as they offer better risk-adjusted value at current levels. Investors looking to deploy a lump sum may consider using a systematic transfer plan over three to six months to manage short-term market volatility.

 

Mathpal also said long-term investors could consider increasing allocation to largecap funds. He, too, advised staggered investment rather than lump-sum deployment.