The small-cap mutual fund segment, a perennial favorite among equity investors seeking high returns, encountered a setback in March 2024 with outflows being recorded for the first time in thirty months. This exodus of funds came in the wake of stress test disclosures by asset management companies (AMCs) last month that prompted a wave of capital withdrawals from the sector.
According to the latest figures from the Association of Mutual Funds in India (AMFI), there has been a sizable 16 percent drop in the inflows into equity schemes during the month under consideration. The data further revealed a net outflow of ₹94.17 crore from small-cap funds in March; the last time such a scenario played out was back in September 2021, when outflows reached ₹248.73 crore.
Addressing the outflow, Venkat Chalasani, Chief Executive of AMFI, attributed the response to recent market reactions against the stress test results. “We have made disclosures and we have also made available information about various stress tests that are done by the (mutual fund) industry. There was a negative reaction from the market (to the stress test results). So, we have seen outflows of ₹94.17 crore (in March 2024),” he stated. Chalasani also mentioned that as some AMCs have introduced restrictions on lump sum investments into small-cap funds, there has been an observable slowdown in the pace of new investments.
A detailed look at the inflow and redemption pattern in March reveals that while ₹5,721.99 crore flowed into small-cap funds, redemptions stood at ₹5,816.16 crore. Reacting to the turbulence in this segment, last month had SEBI, the market regulator, along with AMFI, urged mutual funds to adopt measures safeguarding investors against the undue speculation seen in the small and mid-cap sectors.
Further disclosures from AMFI on stress tests indicated that mutual funds would need a minimum of five days to exit 25 percent of holdings in small-cap funds with assets under management (AUM) near ₹5,000 crore. In the case of mid-cap schemes with similar sizes, the exit time ranged from one to three days. For funds with AUM below ₹5,000 crore, a similar time frame of one to two days would be needed for both small-cap and mid-cap schemes.
Swarup Anand Mohanty, Vice Chairman and CEO of Mirae Asset Investment Managers, pointed out a tapering interest in small-cap funds in March after a previous run dominated by such investments. “While till February, equity inflows predominantly favored mid and small-cap funds, we have seen a slight halt in March. Many investors gravitated towards small-cap funds, driven by high return prospects, however, a disproportionate allocation to such funds can be risky in the long run,” he elaborated, anticipating a trend towards more balanced investments like flexi-cap and large-cap funds.
Chalasani remained optimistic about the inflow prospects for small-cap funds, suggesting that with markets scaling new heights, such equity schemes should continue to attract funds. He also acknowledged that though March saw a 16 percent decline in net inflows into equity-oriented schemes, the month marked the continuation of a positive run starting from March 2021—extending to 37 consecutive months.
The first quarter of 2024 concluded with equity mutual funds experiencing a substantial 36 percent quarter-on-quarter increase, accumulating net inflows totaling ₹71,279.49 crore. This influx was propelled by a rally in the stock market, with the Sensex and NSE’s Nifty 50 climbing approximately 2 percent and 3 percent respectively in the fourth fiscal quarter of the year.
Reflecting on the broader landscape, the mutual fund industry’s net AUM grew by a significant ₹14 lakh crore or 35 percent to ₹53.4 lakh crore in FY24 as opposed to ₹39.4 lakh crore in the previous fiscal year. Additionally, the use of the systematic investment plan (SIP) route continued to gain traction, collecting a record ₹19,270.96 crore in March compared to ₹19,186.58 crore in February. The number of new SIPs registered reached 42,87,117 and the total number of SIP accounts surged to an all-time high of 8,39,71,299 in March.
In terms of specific equity schemes, March saw large-cap funds receive net inflows of ₹2,127.79 crore, mid-cap funds ₹1,017.69 crore, and sectoral/thematic schemes leading the pack with ₹7,917.72 crore.
However, it wasn’t all positive for mutual funds. March saw debt-oriented schemes experiencing considerable outflows totaling ₹1.98 lakh crore, primarily due to the advance tax payments of corporates. Consequently, liquid funds faced outflows of ₹1.58 lakh crore; ultra short duration funds ₹9,134.95 crore; and money market funds ₹8,719.75 crore.
Adversely impacted, hybrid funds too witnessed a marked dip in inflows, down to ₹5,583.62 crore in March from ₹18,105.08 crore in February.
Concluding the report, Chalasani reiterated the pattern observed in the quarter’s ending, especially the fiscal year-end, remarking, “This (outflows from debt mutual funds) is the phenomenon observed in the quarter end and more especially in the year-end.” Despite the challenges, the industry shifts its attention to future strategies, aiming to balance portfolios and safeguard investor interests amidst changing market dynamics.
