Sharp Surge in Inflows into Small & Mid-cap Funds as They Outperform Large Caps

The sharp surge in inflows into small and mid-cap funds reflects the increasing risk appetite of investors as macroeconomic factors improve, foreign brokerage Jefferies said in a report.

Mutual fund flows are inclined towards Mid cap/Small caps. Data from AMFI shows that Small cap and Mid cap focused MF saw net inflows of Rs209 billion CYTD; 1.7x of inflows in Large & Multicap Equity funds. Inflows into Small cap funds were up 53 per cent 5mYoY while flows into mid cap funds were down 8 per cent; compared to large cap funds which saw inflows drying up by 95 per cent over the same period.

Small and mid caps are back in favour outperforming large-caps calendar year to date. Mid and Small cap funds have accounted for disproportionate (1.7x of inflows in Large & Multicap) inflows CYTD & trend seems to be holding up.

“We like the SMID space as it has higher share of domestic economy stocks & also 2x the share of our favourite property/industrial stocks. Large caps have very few options to play investment cycle & spillover of demand to SMID caps can drive large outperformance”, the report said.

Nifty Mid & Small cap have outperformed the large-cap NIFTY-50 index. The outperformance from the SMIDs has been a 2QCYTD phenomenon; with the improvement in macro (RBI pause, inflation falling below 5 per cent, GDP beat) and increasing evidence of a broad-based cyclical recovery being part drivers of the gains for the more domestic-focused stories, the report said.

Cyclicals have driven this outperformance. Domestic capex cycle recovery is a key theme driving SMID cap outperformance with Financial, Industrials and Property contributing 51 per cent of Mid cap index gains YTD. Indeed, 70 per cent of the 96 industrials and realty stocks among NSE500 have delivered higher gains than the median gain of 6 per cent.

Historical data suggests that Mid cap volumes track price performance quite closely. The volume share of Mid caps is currently inline with its 10yr average of 30 per cent; below the peak seen earlier in late'21, despite Mid cap index at new highs. Our overall market vols analysis also shows that non-institutional vols share at 77 per cent, is also inline with average. As such, we believe direct retail participation has yet to rise substantially in the current SMID rally, the report said.