Largecap heavy funds back in reckoning as smallcap fever recedes

Net inflows into two of the ‘lower risk’ equity funds — largecaps and flexicaps — outpaced the flows into smallcap funds during January 2024 for the first time in 17 months.

This is an indication that investors may now be shifting to the relatively safer largecap stocks after a sharp run up in the mid and smallcap spaces.

Net inflows into large and flexicap funds were at Rs 3,730 crore last month against Rs 3,260 crore by smallcap schemes.

Large and flexicap schemes, which generally have over 60 per cent allocation in largecap stocks, struggled to garner funds in the last 15 months.

During this period, investors focused on small and midcaps, which were outperforming the largecap segment by a wide margin.

In 2023, largecap benchmark indices — Sensex and Nifty50 — gained nearly 20 per cent, while the Nifty Midcap 100 and the Nifty Smallcap 100 gained 46.6 per cent and 55.6 per cent, respectively.

During the year, largecap and flexicap funds together collected Rs 4,500 crore while smallcap funds raked in nearly Rs 40,000 crore.

The inflow data does not include new fund offerings (NFOs).

“Valuations of smallcaps have surged considerably in the last one year.

"This led to many analysts asking investors to exercise caution.

"The message seems to have reached investors,” said DP Singh, deputy managing director (deputy MD) and joint chief executive officer (joint CEO), SBI Funds Management.

“This shift in trend is in line with valuation differentials among large vis-a-vis mid and smallcaps.

"This suggests that largecap and flexicap schemes may attract higher flows in the future,” said Akhil Chaturvedi, chief business officer, Motilal Oswal AMC.

As of February 12, the 12-month forward price-to-earnings (PE) ratio of Nifty50 index stood at 20.

In the case of Nifty Midcap 100 and Nifty Smallcap 100, the ratio was 27.8 and 22, Bloomberg data shows.

At the same time, key hybrid offerings — balanced advantage funds (BAFs) and dynamic asset allocation funds — have also seen a spurt in flows during recent months.

BAFs have garnered over Rs 1,300 crore in the past two months compared to an average of Rs 970 crore in the previous six months.

The category had seen outflows in five of the first six months of 2023.

For multi-asset funds, non-NFO inflows surged to Rs 2,833 crore in January compared to an average of nearly Rs 2,000 crore during the previous six months.

As hybrid funds are only partly exposed to equities, they are a lower risk offering compared to pure equity funds.

Most advisors recommend investing in hybrid funds when risks go up in equities.