Small cap mutual funds hog limelight amid outperformance, valuation comfort

Amid economic uncertainties, investors looking for bottom-up ideas are favouring small cap funds. These funds reported the largest folio addition among all the mutual fund segments for the third consecutive month with an addition of 3.6 lakh folios in September. They accounted for 27% of the equity category folio addition during the period, the data from AMFI showed. The folio addition was without the support of any new fund launch. The total number of small cap funds has remained at 24 over the last few months.

Inflow in these funds was also strong. They contributed 17% to the total inflow in the past three months, which was the second highest after the flexi cap funds. In the past seven out of eight months, the buy-to-sell ratio of the small cap funds was more than two times despite high volatility in the equity market reflecting the underlying demand for such funds.

The small cap funds have attracted investors’ attention following their return outperformance and valuation comfort. The BSE Small cap index has outperformed the broader index by 1.5% since the beginning of the year till September 30. It trades at a 17% discount to the S&P BSE Sensex based on the price-to-book multiple compared with the long-term average discount of 21%, according to Bloomberg.

A sustained inflow and capital appreciation lifted the assets under management (AUM) of the small cap funds to a new high of Rs 1.2 lakh crore in September. Their share in the total equity fund AUM rose by 80 basis points year-on-year to a multi-month high of 8.4%.

The AUM expansion of Rs 2,690 crore for the small cap funds was the highest among all equity fund categories in September 2022, when the total industry equity AUM dropped by Rs 14,098 crore on a month on month basis. Over the past 12 months, the AUM of the small cap funds expanded by 26% while the industry AUM grew by 14%.