There is a lot of money flowing into small and mid-cap mutual funds. Of the total net inflows, a sizeable chunk of the money has reached sectoral, mid-cap, and small-cap funds. The latest monthly inflow data from the Association of Mutual Funds in India shows that the risk appetite of individual investors is rising as more money flows into funds with a mandate to invest in specific sectors or small-cap funds. These inflows powered a 35-40% rally in small and mid-cap shares in India in 2023 so far. That is reflected in the performance of the stock indices that track these shares. Indian large-cap shares have only increased by 8-10% in 2023.
The surge in fund flows in July and August 2023 means mutual funds are sitting on a cash pile still waiting to be deployed in mid-cap and small-cap funds. Fund managers would wait for prices to correct before putting more money in these stocks.
If you are keen on benefiting from the surge in small and mid-cap companies, you should ensure that you have assessed your risk profile before investing. A professional financial advisor can help you assess your ability to withstand risks. Looking at the price movements in small-cap and mid-cap company shares compared to large-cap shares, you will find that volatility surges in small and mid-cap shares.
Prices fluctuate rapidly if global markets move in a bearish phase. Fund managers tend to sell risky assets first. However, funds that are only designated as small-cap and mid-cap funds stay put. They have no option but to stay invested or buy more. The other option is they could hold higher cash when share prices fall. That could affect the performance of these shares.
You cannot do any short-term trading in mutual funds. These are vehicles created for long-term investing. Equity mutual funds are supposed to help you create wealth for your sunset years. They are meant to provide you with resources when you retire or are looking to fund the professional education of your child. Your money must stay invested for as long as possible in equity funds.
There is a lot of talk about the rising monthly contribution of systematic investment plans or SIPs to the total mutual fund assets under management. Each month, a new record is set in terms of net inflows. As of August 2023, Rs 15,814 crore was the highest monthly net inflow in SIPs. A growing number of investors are stopping their systematic investment plans or SIPs, according to the AMFI data. The percentage of SIPs discontinued to the total new subscriptions registered has increased sharply.
A lot of data proves that the longer you hold your investment in equity assets, the better the return on investment gets. The probability of you making a loss diminishes. The AMFI data reveals that barely 12% of investors stay in equity mutual funds beyond five years. That is a staggering failure for those looking to project mutual funds as a long-term savings vehicle. The amount of money the mutual fund industry spends on awareness campaigns deserves attention. These campaigns have to prioritise the long-term use of mutual funds.
Another bizarre industry practice is actively promoting the diversified equity funds that generate the ‘alpha’ or outperformance over the benchmark indices. In a fast-growing economy like India, there is a lot of scope to generate that outperformance. However, for those who are not familiar with the world of finance or investing, ‘alpha’ does not matter. They need a steady avenue like an index fund or an index-based exchange-traded fund to generate a return that beats inflation.
As an investor, you need to figure out where you stand regarding risk-taking capability. If you are looking for steady capital growth to meet your long-term financial goals, equity assets can be advantageous over 15-20 years. Mutual funds are the right vehicle, but you must stay put and not pull that money out.