Mutual Fund investment: The latest data released by the Association of Mutual Funds for the month of April, which was the first month of the financial year 2025, saw generous inflows in small-cap mutual fund schemes. Small cap funds are equity mutual funds, which invest a minimum of 65 per cent of their assets in small-cap stocks. There are 27 small cap mutual funds with total assets under management (AUM) amounting to Rs 2.66 lakh crore. In April, these schemes received an inflow of Rs 2,208 crore as compared to mid-cap, which got Rs 1,793 crore, and large cap funds, which got Rs 357.56 crore.
So, what should be your investment strategy for May?
The small cap category witnessed a stark bounce in net inflows in April (Rs 2,208 crore) from a net outflow of Rs 94 crore in March 2024. However, Chirag Muni, Executive Director, Anand Rathi Wealth Limited, said the asset allocation strategy should be based on factors like goals, horizon of investment, risk appetite and liquidity requirement.
Speaking to Business Today, Muni said: "There is no one-size-fit all solution in investing however some standardization can be done through asset allocation. While investing we need to build a strategy with the right asset mix based on our risk appetite to meet our goal. Debt and Equity have a low correlation and a combination of these two assets can help in targeting a return of around 12% based on your horizon of investment. Equity MF has delivered an average return of 14% over longer tenure and Debt MF has approximately delivered 6% return."
As per his recommendation, for the long-term time frame (greater than 5 years), the equity fund should have 80% exposure and the debt funds, it should have 20% exposure. For the medium term (3-5 years), the asset allocation should be in the ratio of 70% equity to 30% of debt funds. The average return in the long term is expected to be 20%, while for the medium term, it is expected to be 11.6%.
Small cap funds vs flexi or multi caps?
Speaking about small cap funds, Muni said: "It is advisable that investors do not restrict themselves to a particular category and instead invest in all of them so that they are better prepared to ease market volatility. Currently, small cap segment is attractive and we do see investors parking funds in the category in case you are someone with no exposure to small cap you should increase the allocation to 20 to 25% in your portfolio."
"Small caps because of higher growth, participation in market favoured themes and under allocation in mainstream funds continue to see dedicated inflows. Current market volatility notwithstanding, flexi caps remain more broad-based investments where the portfolio manager decides market cap allocation. For Regular investors, flexi caps remain the best bet for long-term investment. However, for investors who are underweight small caps at the investor portfolio level may also consider a dedicated allocation to small caps preferably through SIP route," said Akhil Chaturvedi, Executive Director, Motilal Oswal Asset Management Company.
Chaturvedi added that multi cap category also offers an attractive option to investors and invests in a combined formula in a disciplined and dedicated way.
"In Multicap Funds, a minimum 25% must be allocated to each market cap segment viz Large Cap, Mid Cap and Small Cap. This structure ensures disciplined allocation to all market cap segments. Combined with the stock selection expertise of portfolio managers, it offers an attractive proposition," he added.
"Flexi-cap mutual fund schemes provide investors with the flexibility to invest across large, mid, and small-cap stocks, adjusting allocations based on market conditions to manage risk and diversify portfolios. This adaptability makes flexi-cap schemes a popular choice for investors seeking diversification and willing to navigate market fluctuations. Small cap schemes have constraints to focus solely on small cap companies. Flexi-cap allows for stability through the liquidity provided by large-caps, while also presenting opportunities for alpha generation with mid and small-caps. Investors can gradually shift towards large-caps while maintaining exposure to mid and small-caps to capture the recovery phase of the investment cycle effectively," said Atul Parakh, CEO, Bigul.
Parakh added investing is subjective. "Invest in a small-cap fund if you have a high-risk tolerance, have a long-term investment horizon and are looking for high potential returns. Invest in a flexi-cap fund if you want diversification, are comfortable with moderate risk and want some exposure to small-cap stocks but with a safety net," he said.
Top small cap funds in April
> Quant Small Cap Fund- 40.66%
> Bank of India Small Cap Fund- 33.79%
> Nippon India Small Cap Fund 32.03%
> Edelweiss Small Cap Fund 30.70
> Canara Robeco Small Cap Fund 29.82%
> Tata Small Cap Fund 29.75%
> Kotak Small Cap Fund 28.98
> Invesco India Smallcap Fund 28.72%
> Axis Small Cap Fund 28.39%
> ICICI Prudential Smallcap Fund 27.95%
(Data: AMFI, till May 7, 2024)
Top flexi cap funds (1-year return)
> Quant Large Cap Fund-Reg(G): 55.84%
> DSP Equity Opportunities Fund-Reg(G): 46.85%
> Kotak Emerging Equity Fund(G): 43.12%
> HDFC Flexi Cap Fund(G): 43.64%
> HDFC Small Cap Fund-Reg(G) 52.50%
> SBI Contra Fund-Reg(G): 50.08%
> ICICI Pru Dividend Yield Equity Fund(G): 55.23%
> ICICI Pru Focused Equity Fund(G): 46.38%
> Kotak Multicap Fund-Reg(G): 60.61%