Small cap and mid cap mutual funds have caught the investors’ fancy with most of investors’ contribution going into these two categories, far outpacing their larger counterpart.
A closer look at the January data released by the Association of Mutual Funds in India (AMFI) gives a clear indication of greater popularity of small cap and mid cap mutual funds. Sample this: In January alone, small and mid-caps witnessed a total inflow of ₹3,883 against ₹715 crore in large caps.
What has also worked against the large cap mutual funds is that a vast majority of these funds underperformed in 2022.
And January was not an aberration. This trend was seen in the previous months as well. In December, the funds with smaller capitalisation saw an inflow of ₹4,205 crore, against an outflow of ₹26 crore in the large cap category.
Similarly, in November and October, the funds that invest in companies with lower market caps saw an inflow of ₹2,554 crore and 2,966 crore, respectively whereas the inflow to large cap funds during these months were (-) ₹1038 and 173 crore, respectively.
| Month | Small Caps ( ₹crore) | Mid Caps ( ₹crore) | Large Caps ( ₹crore) |
| Jan, 2023 | 2,255 | 1,628 | 715 |
| Dec 2022 | 2,244 | 1,962 | -26 |
| Nov 2022 | 1,378 | 1,176 | -1038 |
| Oct 2022 | 1,581 | 1,385 | 173 |
(Source: AMFI)
Why are small cap funds popular?
Although there could be reasons aplenty, investment advisors believe that the small cap and mid cap funds have gravitated more funds because they offer better returns and greater diversity of stocks.
Sridharan Sundaram, founder of Wealth Ladder Direct, says that mid cap funds have out-performed their larger peers if you follow their past returns. If you look at the past seven-to-10-year returns, you will discover that the mid cap funds have delivered a return which is 2-3 percent more than that of large caps, particularly via SIP (systematic investment plan) investment, he adds.
Another reason for investors to choose, mid cap is that they offer greater diversity. Out of the investing universe of 500 stocks, around 400 fall in the mid and small cap space while the remaining 100 are large cap stocks, says Sridharan.
Deepesh Raghaw, a SEBI-registered investment adviser and Founder of Personal Finance Plan, says that many investors tend to invest in small and mid-caps because, in the long run, they tend to give better returns.
While sharing a word of caution, Raghaw says. “Sometimes small caps do very bad, for instance in the year 2019, they did badly.”
He also cites the ‘Barbell approach to investing’ to explain the popularity of small cap funds.
The barbell approach says that the best way to strike a balance between reward and risk is to invest in the two extremes of high-risk and low risk.
Large caps, as we know, are seen as low-risk assets whereas small caps carry a higher risk.
"Mid and Small cap funds in general seem to offer good value currently given they have not moved up in tandem with large caps. While the volatility (risk) has historically been higher for such funds, so have been the returns. Well researched small and mid cap stocks do present the potential of turning into large successful businesses over a period of time which ideally could result in a strong price performance and their moving into larger cap segments,” says Abhishek Dev, co-founder and CEO of Epsilon Money Mart.
