After being overlooked by investors for several years, the Indian mutual fund industry witnessed a renewed momentum in FY15, registering over Rs 68,000 crore of net inflow in equity schemes. While it provided the industry enough reason to cheer, a detailed look shows that the mid- and small-cap schemes of mutual funds were the significant gainers. The ballooned assets under management (AUM) of mid- and small-cap schemes also shows that investors deviated from the existing (established) norm of investing mostly in large cap schemes.
Data sourced from myplexus.com shows that the aggregate AUM of 38 mid- and small-cap schemes amounted to Rs 27,657 crore as on March 31, 2014. However, within a year it jumped 138 per cent to Rs 65,935 crore as on March 2015. Also, four new schemes got added into the category during the year.
The sharp rise in inflows into the schemes in the category, which traditionally has witnessed limited investor interest, followed the rally in stock prices of mid- and small-cap companies. While the Sensex at the Bombay Stock Exchange rose by 25 per cent in FY15, the mid-cap and small-cap indices at the exchange rose by 49 per cent and 53 per cent, respectively.
Though the huge difference in performance of the large and mid- and small-cap segments were enough to create a pull for these schemes, an added push by distributors resulted into a stronger inflow.
Investment advisors are, however, cautious about the trend and point that even within equities, mid and small caps are riskier assets than diversified large-cap or multi-cap funds and are prone to significant correction in case there is a fall in the markets.
Investors should follow asset allocation even within the asset class and must avoid putting all their equity money into mid-cap and small-cap schemes, they suggest.
“Not only it is easy to sell what is performing, there was even pull from investors for these schemes and that has resulted into a significant inflow into these schemes over the last one year. While investors should invest in these schemes for higher returns, they should limit their exposures in mid- and small-cap schemes to 30 per cent of the total equity mutual fund investment as in a bad market, they are the ones who also fall the most,” said Surya Bhatia, a Delhi-based financial planner.
How they stack up The numbers tell the story. HDFC Mid-Cap Opportunities Fund, which had AUM of Rs 3,160 crore in March 2014, is now a scheme with AUM of over Rs 10,000 crore. In March 2015 it had risen to Rs 9,600 crore. Similarly, ICICI Prudential Value Discovery Fund witnessed its AUM rise from Rs 3,007 crore in March 2014 to Rs 8,800 crore in March 2015. Even relatively smaller schemes that had AUMs of under Rs 1,000 crore a year ago have witnessed a sharp rise. For example, UTI Mid Cap scheme saw its AUM jump almost eight times from Rs 298 crore to Rs 2,573 crore. That of Kotak Emerging Equity rose over 10 times from Rs 50 crore to over Rs 500 crore during the same period.
“It was a less than Rs 30,000 crore category some three years back and remained so till last year but now has grown to over Rs 65,000 crore. The growth over the last year has happened not only because of the mark-to-market but also due to of genuine interest and inflow from investors,” said Prasunjit Mukherjee, founder of myplexus.com. There were 27 schemes operating within the mid- and small-cap category in March 2008 with an aggregate AUM of Rs 19,675 crore. While this rose to 38 schemes with AUM of Rs 27,657 crore by March 2014, the real growth happened over the last one year following the rally in mid- and small-cap stocks. Market participants see a clear trend of strong inflow of funds within this category and say that a lot of the retail money is going into these schemes tracking their strong performance.
“Retail investors tracking one year performance are getting sold to the idea as other categories have lagged in performance. This is phenomenon that has been seen historically with the start of any rally but this time it is far more skewed because the difference in performance between mid- and small-cap and the large-cap schemes is significantly higher,” said Vishal Dhawan, CFP and founder of Plan Ahead Wealth Advisors.
Experts also point that distributors within the mutual fund industry have been aggressively selling mid- and small-cap schemes over the last one year as it was easy to sell — there was a demand for the product because of the strong short-term performance which made it easy for them to sell. “It is important to educate the customer on how much he should be invested in this category which is relatively riskier. Not doing so amounts to mis-selling,” said an experts. Is the trend healthy? Mid- and small-cap companies are the ones that will become large caps in the future and therefore they schemes have the potential to generate higher return.
However, not all firms become Infosys or HDFC Bank that generated consistently strong return for their investors. While investment into mid- and small-cap schemes is not something that one should be averse to, experts feel that even within an asset class such as equity mutual funds, investors should have proper asset allocation across various categories and it is not a good decision to park all your investment into a more risky category. The consensus among investment advisors is that only up to 30 per cent of equity mutual fund investment should be routed into mid- and small-cap schemes. There is a view that if the money is going into mid- and small-cap schemes it should be through systematic investment plans.
A lump sum investment misses out on the benefits of averaging out the cost and so a fall in market impacts such investments more. Bhatia feels that taking on a large investment based on one-year performance is not a good decision. “A one-year return of 50 per cent makes even a five year performance look good as it lifts the average return over the period and investors should keep that in their mind.” He added that new investors should first invest into large- or multi-cap schemes which can absorb volatilities in a better manner and then look to expose themselves to mid- and small-cap companies.