In spite of the concerns raised by SEBI and the measures taken by leading fund houses, inflows into small and mid-cap funds remain strong as investors continue to show confidence in the growth potential of India. Net inflows into small-cap funds more than doubled in the December quarter to ₹12,552 crore, compared to ₹6,085 crore in the previous quarter. Similarly, investments in mid-cap funds nearly tripled last year to ₹14,660 crore, up from ₹4,887 crore in the March quarter.
The significant inflows into these sectors can be attributed to the strong stock performance of small and mid-cap companies. While the Sensex only saw an 8% gain last year, the BSE Small-cap index surged by 29%. Nikhil Rungta, Co-Chief Investment Officer at LIC Mutual Fund, believes that mid and small-cap companies will be key players in achieving the government’s target of a $5 trillion economy over the next five years. He also mentioned that while there are concerns about frothiness in some top companies in this segment, there are still opportunities to identify value-for-money stocks.
Despite the stretched valuations, investors are still confident in small-cap funds due to their growth potential and the track record of generating alpha through active stock selection. Anirudh Garg, Partner and Fund Manager at Invasset PMS, highlighted the importance of acknowledging the elevated valuations of small and mid-cap stocks, which may pose a risk of corrections.
Leading fund houses such as ICICI MF, Kotak MF, Nippon India MF, SBI MF, and Tata MF have either capped or halted lumpsum investments in small-cap schemes due to challenges in deploying funds at stretched valuations. Instead, they are recommending investments through SIPs in small and mid-cap funds.Overall, investors continue to bet big on the India growth story, despite the concerns raised by regulatory authorities.
