Retail investors come of age in 2023 with small and midcap funds outperforming

• According to AMFI data, as of early-December, the average one-year returns for 23 small-cap funds stood at 32.68%.
  
• 58% of the large cap funds failed to beat their underlying indices in the first half of 2023.
  
• Contributions to SIPs surpassed a record ₹17,000 crores in November.
  

After a brutal 2022, mutual funds have had a solid year in 2023 with retail investors having come of age. Moreover, according to Association of Mutual Funds in India (AMFI) data, mutual funds industry assets under management (AUM) have crossed the ₹50 lakh-crore mark!

Investments into equity mutual funds saw an inflow of ₹124,053 crore in the first nine months of 2023 indicating a strong interest and belief in the potential of the equity market among domestic investors.

This was not of course without its share of blips. In April 2023, inflows into equity mutual funds stood at ₹6,480 crore, down 68% from March when it was ₹20,534 crore.

Last time inflows were lower was in November 2022, when it stood at ₹2,258 crore. Inflows into equity mutual funds again halved in May, probably because high market valuations made investors book profits and stay away from fresh investments.

However, ever since then the flows into equity mutual funds have remained steady, reaching a high of ₹19,932 crore crore in October.

Small and mid caps steal the show

According to AMFI data, as of December 6, 2023, the average one-year returns for 23 small-cap funds stood at 32.68%. In contrast, 28 mid-cap funds delivered average one-year returns of 28.02%, in the same period.

By November end, AUM of mid-cap funds had crossed the ₹ lakh crore mark, a 69% rise as compared to last year.

In fact, small cap funds registered inflows of ₹3,699.24 crore in November ,slightly lower than the ₹4,495.13 crore recorded in October. Small cap funds had registered a record inflow of ₹5,472 crore in June, with inflow into small cap mutual funds being the highest among all equity fund categories for the third straight month.

In August, small cap funds saw an inflow of ₹4,265 crore, with a slight blip in September when inflows fell to ₹2,678.47.

This has been driven by the ongoing economic recovery, which has fueled corporate earnings growth, particularly among smaller companies with high-growth potential. Investors are optimistic about the future prospects of these companies, leading them to seek exposure through small-cap funds. AMFI chairman said it was the outcome of a recency bias.

The surge in investor interest in mid-cap funds has also been fueled by several factors, including India's robust economic recovery, the inherent growth potential of mid-cap companies, their reasonable valuations compared to large-cap stocks, and supportive government policies.

Large-cap funds funds underperform

Large cap funds, however, had a rather dull 2023. Large-cap mutual funds experienced significant outflows in June, July, and May, totaling ₹2,050 crore, ₹1,880 crore, and ₹1,362 crore, respectively, making these some of the worst months for large cap funds.

However, following six consecutive months of outflows, large-cap funds experienced an inflow of ₹724 crore in October, signaling a resurgence in investor confidence in established companies. November saw an inflow of ₹306 crore.

In fact, 58% of the large cap funds failed to beat their underlying indices in the first half of 2023.

This can be due to the confluence of factors, including rising interest rates favoring bonds, regulatory changes limiting fund manager flexibility, investor rotation seeking higher growth in smaller-cap stocks, and underperformance in key sectors like technology and consumer discretionary.

SIP contributions witness a steady rise

One of the biggest trends is the steady increase in monthly SIP contributions. SIP inflows reached ₹1.66 lakh crore in the first 11 months of 2022, higher than ₹1.5 lakh crore in entire 2022.

Contributions surpassed a record ₹17,000 crores in November. In November 2022, the SIP contribution stood at ₹13,306 crore. The number of SIP accounts were at the highest ever in November at 744.13 lakh crore, compared to 730.02 lakh crore in October.

The total SIP AUM (assets under management) has also shown impressive growth, exceeding ₹6.42 lakh crores in October. Despite facing market fluctuations, SIPs have demonstrated remarkable resilience. The consistent inflows and stable AUM indicate that investors are adopting a disciplined approach and remain confident in the long-term prospects of the market.