Assets of small-cap mutual funds increase 83% to Rs 2.43 lakh crore in FY24 due to a surge in regular investors

Assets of small-cap mutual funds increase 83% to Rs 2.43 lakh crore in FY24 due to a surge in regular investors

Alongside the asset boom came a rise in investor numbers; in March 2024, there were 1.9 crore folios, up from 1.09 crore the previous year, adding 81 lakh new investors to the pool. This demonstrates the preference of investors for small-cap funds.

Flows, increased involvement from individual investors, and positive market conditions have increased the assets of the small-cap mutual fund category to Rs 2.43 lakh crore by the end of March 2024, an 83 per cent increase over the same period the previous year.

Alongside the asset boom came a rise in investor numbers; in March 2024, there were 1.9 crore folios, up from 1.09 crore the previous year, adding 81 lakh new investors to the pool. This demonstrates the preference of investors for small-cap funds.

The development trajectory of the Indian economy is drawing more attention, according to Gopal Kavalireddi, Vice President of Research at FYERS, and many unlisted small-cap companies are turning to the capital market for help. For investors considering chances for long-term development, this trend presents favorable options.

But he also said that variables like the general elections, monsoon predictions, economic activity, inflation, GDP estimates, and FY25 profits growth are probably going to affect the values of small-cap companies and create volatility in this market.

Small-cap funds had inflows of Rs 40,188 crore in the fiscal year 2023–2024, much more than the Rs 22,103 crore inflows seen in the previous fiscal year.

But for the first time in more than two years, small-cap funds had a net outflow in March, totaling Rs 94 crore.

This occurred after the markets regulator Sebi's late-February worries on the accumulation of foam in small- and mid-cap funds, which prompted mutual fund firms to set up a system to protect investors' interests.

Concerns arose against the background of a massive inflow into mutual fund small- and mid-cap schemes in recent quarters.

The asset under management (AUM) of small-cap mutual funds reached a height of Rs 2.43 lakh crore at the end of March 2023, up from Rs 1.33 lakh crore in March 2022, according to statistics from the Association of Mutual Funds in India (AMFI).

Kavalireddi gave various reasons for the enormous increase in assets, including appealing returns, optimistic investor attitude, portfolio diversification, and an increase in retail involvement.

Jay Shah, the founder and CEO of Finwisor, said, "The smallcap index itself has grown 60% in FY24, accounting for the majority of the growth in AUM."

Also, a major element pushing higher allocations to small-cap funds has been the optimistic attitude that investors now have, which has been reinforced by robust economic growth and earnings development.

Finally, small-cap funds became popular as a desirable component of diversified portfolios due to the inflow of capital into stocks and their potential for notable growth and undervaluation in FY23.

Due to significant inflows and mark-to-market gains, the total assets under management (AUM) of equity-oriented mutual fund categories increased by 55% to Rs 23.50 lakh crore in the fiscal year 2024. Net inflows for the category increased to Rs 1.84 lakh crore in FY24 from Rs 1.47 lakh crore in the prior fiscal year.

Fund managers in small-cap mutual funds must allocate at least 65% of their portfolios to small-cap companies in accordance with Sebi regulations.

Anticipating FY25, Shah of Finwisor said, "Outstanding profits growth has contributed to smallcap gains, in addition to the general mood of the market. But in the past, it has been noted that high returns are often followed by poor returns. The chance of zero to low returns is thus greatest for FY25."

While small-cap funds seem like attractive options for growth, they are characterized by high volatility, little liquidity, erratic market risks, and scant research coverage.

Thus, before considering investments in this category, industry professionals advised investors to carefully evaluate their risk tolerance and investment horizon.