Small-Cap Funds Lose Their Sheen Bringing Down Inflows Into Equity Mutual Funds by 16% in March

Small cap mutual funds saw outflows for the first time in 30 months in March, as investors turned cautious after the capital markets regulator the Securities and Exchange Board of India (SEBI) raised concerns over "froth" in the segment. However, Inflows into equity funds have remained in the positive zone for the 37th straight month.

New Delhi: Inflows into open-ended equity mutual funds slumped 16 per cent to Rs 22,633 crore in March as compared to February, led by outflows in small cap funds, according to data released by the Association of Mutual Funds of India (AMFI) today.

Small cap mutual funds saw outflows for the first time in 30 months in March, as investors turned cautious after the capital markets regulator the Securities and Exchange Board of India (SEBI) raised concerns over "froth" in the segment. However, Inflows into equity funds have remained in the positive zone for the 37th straight month.

Smallcap funds saw a net outflow of Rs 94 crore in March against a net inflow of Rs 2,922.45 crore in February. The last time smallcap funds saw net outflows, of Rs 249 crore, was in September 2021.

Net inflows into midcap funds slumped 44 per cent to Rs 1,018 crore against investments of Rs 1,808.18 crore in February, the AMFI data shows.

There was a reversal of flows to large-cap funds as inflows into the category jumped 131 per cent to Rs 2,128 crore in March.

Commenting on the AMFI data, Anand Vardarajan, Business Head – Banking, Institutional Clients, Alternate Products and Product Strategy at Tata Asset Management said “ March saw some interesting changes in MF flows. The entire debt category was negative except for long-duration funds. Usual balance sheet build-up in the year-end led to outflows in the liquid ultra-category. A tight liquidity situation led to outflows despite short-term yields peaking led to outflows. Quarterly seasonality of tight liquidity coinciding with the year-end led to even more pronounced outflows.”

Equity net flows dipped led by a fall in flows in the small and midcap categories. The stress test results in the small and midcap space coupled with high valuations could be the reason for flows to ebb here. There is a slight rotation we are seeing where large-cap and predominantly large-cap funds like flexi cap or large and mid caps have benefited in flows at the margin as investors may be moving in here due to relative valuation comfort, he added.

Incidentally, in late February this year, the Securities & Exchange Board of India (SEBI) had instructed mutual funds to dig deep in their small and midcap fund portfolios to gauge how liquid and volatile they were compared to their benchmarks among other such indicators.

The markets regulator asked all fund houses to conduct stress tests to determine how long would it take to liquidate 50 per cent and 25 per cent of their small and midcap portfolios.

According to the results of the first stress test, which came out around March 15, it would take an average of about six days for midcap funds to liquidate 50 per cent of their portfolios and about 14 days for small cap funds to do the same if the markets were to crash and investors rush for redemptions.

“Hybrid category and the particularly multi-asset has seen flows. It is palpable to see asset allocation funds like multi-asset or hybrid finding favour as clients may be taking fresh guard of their allocations. Arbitrage which has seen the strongest inflows in the hybrid category paused in March,” Vardarajan said.

The AMFI data shows that contributions via systematic investment plans (SIPs) remained above the Rs 19,000 crore level for the second straight month. As per AMFI data, the SIP book was at Rs 19,271 crore against Rs 19,187 crore in February.

In the fixed-income category, debt mutual funds saw net outflows of nearly Rs 2 lakh crore. Within the category, liquid funds saw net selling of Rs 1,57,970 crore followed by ultra-short duration at Rs 9,135 crore.

Due to the net outflows from debt funds, overall assets under management of the Indian mutual fund industry dipped to Rs 53.40 lakh crore against Rs 54.50 lakh crore in February.