Investors to Lower Return Expectations from Mid and Small-Cap Equity MFs
Investors are expected to lower their return expectations from mid and small-cap equity mutual funds (MFs) in the calendar year 2024. According to a report by Business Standard, high valuations and lack of further positive triggers are prompting investors to seek better returns in the large-cap equity MF segment.
Large cap Equity MFs Offer Better Returns, Analysts Say
Analysts suggest that investors should consider investing in large cap equity mutual funds for better returns. The inflows from foreign institutional investors, stable macroeconomic indicators, and robust earnings momentum have propelled the domestic equity market to report its best annual return in calendar year 2023 since 2017. The Nifty50 rose 20.1 per cent, while the BSE Sensex spiked 19 per cent during the year.
Foreign Institutional Inflows Boost Large-Cap MFs in 2023
Foreign institutional investors have played a significant role in boosting large-cap equity mutual funds in 2023. The data provided by the Association of Mutual Funds in India (Amfi) shows that large-cap equity mutual funds witnessed outflows of ₹2,687.2 crore between April and November 2023. Conversely, the Nifty midcap index spiked 46 per cent, and the small cap index rose 48 per cent in the same year.
Mid and Small-Cap MFs Lose Investor Interest; Large-Cap Gains
The cumulative share of flows into small and midcap categories over the past three years stands at 28.3 percent against assets under management (AUM) share of 19 per cent, according to Amfi. The valuation of mid and small-cap cohorts is not very comfortable, with many stocks trading above their intrinsic value. This has led investors to favor large-cap funds for their comparatively reasonable valuations. As of December 6, 2023, small-cap funds delivered an average one-year return of 32.68 per cent, while large-cap and midcap funds delivered 15 per cent and 28.02 per cent, respectively.
Structural Positives Forecast Higher Foreign Flows Into Large-Cap MFs in 2024
According to the analysts, structural positives such as expected political stability, rising investment cycle, multi-year growth visibility, and the peaking of the dollar may drive higher foreign flows into large-cap equity mutual funds in 2024. India’s relative positioning is still light in emerging market (EM) portfolios, and the rising size is making Indian markets much more relevant for global mandated funds. This trend is expected to continue in the coming year.
In conclusion, investors are adjusting their return expectations from mid and small-cap equity mutual funds and turning towards large-cap funds for better returns. The strong performance of large-cap funds, driven by inflows from foreign institutional investors and favorable macroeconomic indicators, has made them an attractive option. Looking ahead, the expected structural positives in the Indian economy may further boost foreign flows into large-cap equity mutual funds in 2024.
Analyst comment
Neutral news: Investors to Lower Return Expectations from Mid and Small-Cap Equity MFs
As an analyst, the market for mid and small-cap equity mutual funds is expected to experience a decline as investors are lowering their return expectations. They are instead seeking better returns in the large-cap equity MF segment due to high valuations and lack of positive triggers. This shift in investor behavior could lead to increased inflows into large-cap funds and potentially impact the performance of mid and small-cap funds in the coming year.
