Large and mid-cap funds are likely to witness increased activity during a volatile market: ICRA Analytics

Large and mid-cap funds have seen tremendous growth, with assets under management soaring by over 500% in the last five years, reaching Rs 2.57 lakh crore by July 2024. This remarkable expansion is further underlined by the impressive compounded annualised returns – 44.07% in one year, 21.85% in three years, 23.67% in five years and a robust 16.40% in seven years.

Large and mid-cap funds are likely to be a major draw for investors in the coming days amid heightened volatility in domestic markets following escalating geopolitical risks and global uncertainty. The prospect of having a diversified portfolio along with good returns is attracting investors to such funds, according to a press release from ICRA Analytics.

Large- and mid-cap funds have seen more than five-fold growth in assets under management (AUM) over the past five years, touching Rs 2.57 trillion in July, up from Rs 0.50 trillion in July 2019. The compounded annualised returns of large- and mid-cap funds are 44.07 per cent in one year, 21.85 per cent in three years, 23.67 per cent in five years and 16.40 per cent in seven years.

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People prefer to invest in such funds because it helps them to: portfolio diversification and also allows them to reap the benefits of the growth potentials of large- and mid-cap stocks in a single fund, the press release stated.

This is clearly evident from the rise in the number of folios, which has increased by 126 per cent to 100.78 lakh as of July 2024, compared to 44.55 lakh in July 2019. “Rising geopolitical risks, concerns over rising valuations and uncertainty over how the global interest rate cycle will play out in the coming months are some of the factors that can lead to volatility in the market. Large-cap and mid-cap funds can be a good investment option if these funds have exposure to companies that have comparatively strong balance sheets, established businesses and stable earnings growth that can offer the much-needed stability during market volatility and uncertainty,” said Ashwini Kumar, Senior Vice President and Head – Market Data, ICRA Analytics. In terms of flows, net flows into large-cap and mid-cap funds have increased by 276 per cent to Rs 2,622.29 crore in July 2024 from Rs 697.13 crore in July 2019.

“These funds are gaining traction as they offer the dual benefit of stability of large-cap stocks and growth potential of mid-cap stocks. Large-cap companies are well-established companies with a strong balance sheet and good governance, which imparts stability to the entire portfolio during market volatility. Meanwhile, mid-cap companies have huge growth potential as they have the ability to become large-cap companies in the coming years,” Kumar said.

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Despite volatility in domestic equity markets following heightened geopolitical tensions and concerns over an economic slowdown in China and the US, the Indian mutual fund industry continued to witness a robust rise in inflows in July.

Net inflows into the mutual fund industry rose 130% to Rs 1.89 trillion in July 2024. Net inflows stood at Rs 82.046 trillion last year. Net assets under management grew 40%, approaching the Rs 65 trillion mark in July 2024 and stood at Rs 64.97 trillion, up from Rs 46.38 trillion in July 2023.

On a monthly basis, net AUM increased 6% from Rs 61.16 lakh crore in June 2024.

According to Kumar, “the entrances to equity mutual funds increased more than four-fold to Rs 37,113 crore in July 2024, compared to Rs 7,626 crore in July 2023. The resilience of the Indian financial market coupled with improved growth prospects of the Indian economy are boosting investor sentiment, leading to increased participation by retail investors, thereby contributing to higher inflows into equity mutual funds.”

Among equity mutual funds, sectoral/thematic funds recorded inflows worth Rs 18,386 crore during the month under consideration.

Kumar stressed the need to be well informed and exercise caution while investing in sector or thematic funds: “These funds have a bias as they are inclined towards one theme or sector. In case the concerned sector or theme experiences some headwinds, then the entire fund may start underperforming as it has a high exposure to a particular sector.”

“This is in stark contrast to diversified funds, as they have exposure to multiple sectors and are well insulated from such sectoral shocks, although they are not completely immune to them. Therefore, before investing in sectoral or thematic funds, an investor should have a good understanding of the sector. It is also important to monitor the sector on an ongoing basis and rebalance their portfolios regularly based on market developments,” he said.