Retail investors lap up small-cap MFs

New Delhi: Influx of flows, upsurge in retail investors’ participation and bullish market conditions have boosted the assets for the small-cap mutual fund (MF) category to Rs2.43 lakh crore mark at the end of March 2024, marking an 83 per cent surge compared to the previous year.

The surge in assets was complemented by an increase in the number of investors, with the number of folios reaching 1.9 crore in March 2024 from 1.09 crore a year ago, adding an investor base of 81 lakh. This shows investors’ inclination for small-cap funds.

Gopal Kavalireddi, vice-president (research) at FYERS, said that the growth trajectory of India’s economy is attracting increased interest, leading many unlisted small-cap firms to seek support from the capital market.

This trend offers promising opportunities for investors eyeing long-term growth prospects. However, factors such as General Elections, monsoon forecasts, economic activity, inflation, GDP projections, and FY25 earnings growth are likely to influence small-cap company valuations and induce volatility in this segment, he added. In the financial year 2023-24, small-cap funds witnessed an inflow of Rs40,188 crore, way higher than the Rs22,103 crore inflow seen in the preceding fiscal.

However, the month of March saw small-cap funds witnessing a net outflow for the first time in over two years at Rs94 crore. This came after markets regulator Sebi, in late February, raised concerns over froth building up in the small and mid-cap funds and directed mutual fund houses to put in place a framework to safeguard the interest of investors, who invested in these funds. The concerns came in the backdrop of huge flow in the small and mid-cap schemes of mutual funds over the past few quarters.

According to the data from Association of Mutual Funds in India (AMFI), the asset under management (AUM) of the small-cap mutual fund hit its peak of Rs 2.43 lakh crore at the end of March 2023 as compared to Rs 1.33 lakh crore in March 2022. Kavalireddi attributed the huge surge in assets to several factors such as attractive returns, positive investors’ sentiment, portfolio diversification and a rise in retail participation.

“Smallcap index itself has grown 60 per cent in FY24, accounting for the majority of the growth in AUM,” Jay Shah, Founder and CEO of Finwisor, said.