Mutual Funds: Small-Cap Schemes Perform Well in May ’23

Small-cap schemes of asset management companies (AMCs) or fund houses are an attractive proposition for mutual funds investors. This was highlighted as per the numbers where these schemes notched the biggest share of inflows among equity schemes in May 2023.

In May 2023, small-cap funds saw net inflows of Rs 3,282.50 crore as against Rs 2,182 crore in April 2023, as per the data of the Association of Mutual Funds in India (AMFI). In fact, this was the highest among equity mutual fund categories.

The returns from small-cap funds have also been the highest in the past three years. At least seven small-cap schemes have given more than 44% returns under their direct plans in three years. The direct plan of the top-performing scheme among all small-cap funds has offered about 63% returns in the last three years, as per data on the AMFI’s official website.

Significantly, the inflows in small-cap schemes was seen even while categories such as large-cap, flexi-cap, and equity-linked savings scheme (ELSS), etc, witnessed net outflows.

In all, equity-oriented schemes witnessed net inflows of Rs 3,240.30 crore in May 2023. This underscores the fact that the net flows were significantly influenced by the inflows in small-cap schemes.

Experts are of the opinion that this trend is related to the fact that there has been considerable correction in the small-cap universe. At the moment, there are a large number of good quality stocks available, which are at attractive valuations.

Small-cap schemes have been gaining significant ground in terms of demand over the past few months, as per the AMFI data. Interestingly, the S&P BSE Smallcap index had witnessed a dip of 1.8% in 2022, this despite the benchmark S&P BSE Sensex gaining about 4.5%. In the calendar year to date, the Sensex saw an upswing of about 3%, at the same time the small-cap barometer has gained about 8.5%.

It is important to note that small-cap funds are extremely risky and volatile. It is for this reason that these schemes are suggested only to aggressive investors who have adequate risk appetite and can face volatility.

Also, an investor needs to have a longer investment horizon of about seven to 10 years. A longer investment horizon would aid in navigating volatility better.

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