In recent months, small-cap and mid-cap funds in India have attracted significant investor interest, even as the broader equity markets have eased from their all-time highs. Data indicates that since the beginning of the financial year, mid-cap funds have recorded net inflows of ₹14,756 crore, while small-cap funds have seen net investments totaling ₹15,586 crore as of the end of September.
While sectoral and thematic funds have experienced the highest inflows this financial year—amounting to ₹96,489 crore—much of this growth can be attributed to new fund offers (NFOs). Investors appear to be favoring small-cap and mid-cap funds, rewarded by their strong performance compared to large-cap stocks. For instance, the Nifty Midcap 150 Total Return Index (TRI) has gained 4.67% over the past three months, while the Nifty Smallcap 250 TRI has increased by 6.51%. In contrast, the Nifty 50 TRI only rose by 1.56% during the same period. Notably, despite broader market corrections in the last month, small-cap and mid-cap indices have demonstrated relative resilience.
Aakash Manghani, Fund Manager-Equities at TRUST MF, highlighted the growing significance of small-cap companies in the economy, describing them as fertile ground for potential multi-baggers that can offer outsized gains as they scale.
However, the influx of capital into small-cap funds has prompted many fund managers to adopt strategies aimed at reducing portfolio risk. A common approach to risk mitigation is to increase cash holdings within the funds. High cash allocations often suggest a cautious outlook toward the stock market, indicating that managers may view the market as overvalued or are anticipating more favorable investment opportunities in the future.
Overall, while there is clear enthusiasm for small-cap and mid-cap investments, the elevated cash levels in these funds reflect a prudent approach among managers, balancing the potential for growth with the need for risk management in a potentially volatile market environment.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investments in mutual funds and securities are subject to market risks, and past performance is not indicative of future results. Before making any investment decisions, individuals should conduct their own research or consult with a qualified financial advisor to assess their risk tolerance and investment objectives. The information provided herein is based on current market conditions and may change without notice.
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