Small, midcaps remain mutual fund investors' top choice in March

Smallcap funds added 360,000 folios in March, second-most among equity-scheme categories

Even as net flows into smallcap funds in March turned negative, for the first time in 30 months, they remained a big draw for new investors.

The smallcap fund category saw a net of 360,000 investment accounts, or folios, getting added last month, the second-most among all active equity categories.

Smallcap funds’ continued traction could be driven by their strong performance across timeframes, say experts.

Small and midcap schemes dominate the top-performing fund lists, especially in the five-year and 10-year timeframes.

Sectoral and thematic fund category, which has six times more schemes than the smallcap fund space, led the race with 817,000 folio additions in March.

Midcap funds also managed to add more folios than the lower-risk largecap and flexicap funds.

Midcap schemes added nearly 300,000 folios, while largecap funds added 179,000 and flexicap funds 256,600, shows data from the Association of Mutual Funds in India (Amfi).

Smallcap funds added the second-highest number of folios, even as their monthly net additions were only a third of the January peak of 978,000.

The decline in account additions and slump in net inflows in the past two months comes amid regulatory scrutiny of smallcap and midcap funds and an increase in volatility.

In February, the Securities and Exchange Board of India (Sebi) had directed fund houses to take steps to ensure investors were protected from the so-called froth that was building up in the small and midcap segments.

They were asked to prepare an investor-protection framework and disclose additional details like the time they would need to liquidate 50 per cent of the portfolio and investor concentration.

The Nifty Smallcap 100 index fell 4.4 per cent in March, but it has more than recovered this month, going up 6.6 per cent so far in April.

The Nifty Midcap 100 index ended March with a 0.5 per cent decline.

According to analysts, the smallcap and midcap space remains expensive, and investors looking to invest should take a staggered approach.

"Overall, we continue to have a positive bias on the equity market.

"Valuations are relatively rich but we expect the premium to sustain based on expectations of improvement in corporate profitability and stable domestic macros and strong liquidity inflows.

"Many of the smallcap and midcap stocks clearly are extremely expensive.

"Exposure to smallcap and midcap funds should be taken through staggered investments,” ICICI Securities said in a recent report.

With a large number of new account openings, gross inflows into smallcap funds remained elevated in March.

They together raked in Rs 5,700 crore, the third-highest among all active equity fund categories.

The net outflow of Rs 94 crore was a result of profit-booking, as investors pulled out Rs 5,800 crore during the correction.

Mirae Asset MF cautions overseas ETF investors

Mirae Asset Mutual Fund on Monday cautioned investors that their international ETFs are trading at significant premium as it cannot create fresh units.

The industry has exhausted its international investment limit, both direct and ETFs.

The fund house has earlier said that the restriction on international investments will potentially impact the liquidity and trading price of its ETFs — Mirae Asset NYSE FANG+ ETE, S&P 500 Top 50 ETF, and Hang Seng Tech ETF — on the exchanges.