Thanks to high valuations and lack of further positive triggers, investors are expected to lower their return expectations from mid and small-cap equity mutual funds (MFs) in the calendar year 2024, reported Business Standard.
Instead, they want investors to invest money in large cap equity mutual funds for better returns.
Driven by inflows from foreign institutional investors, stable macroeconomic indicators, and robust earnings momentum, the domestic equity market reported its best annual return in calendar year 2023 since 2017.
The benchmark Nifty50 rose 20.1 per cent, while the S&P BSE Sensex spiked 19 per cent.
The data provided by Association of Mutual Funds in India (Amfi) shows that large cap equity mutual funds witnessed outflows of ₹2,687.2 crore between April and November 2023. Conversely, the Nifty midcap index spiked 46 per cent, and the small cap index rose 48 per cent in 2023.
The cumulative share of flows into small and midcap categories over the past three years now stands at 28.3 percent against assets under management (AUM) share of 19 per cent, according to Amfi.
“The valuation of mid, and small cap cohorts isn’t very comfortable. Most of the positives are priced in, and a large number of stocks are trading above their intrinsic value. By comparison, a few large cap stocks are trading at reasonable valuations. So, from a risk-return perspective, large cap funds may generate lower than-historical average returns in 2024. Mid and smallcap funds hardly have any upside left,” said George Thomas, fund manager equity, Quantum Mutual Fund.
As of December 6, 2023, the average one-year return for 23 small-cap funds was 32.68 per cent, Amfi data suggests.
In contrast, 30 large-cap and 28 midcap funds delivered average one-year returns of 15 per cent and 28.02 per cent, respectively during the same period.
The sharp outperformance of small and midcaps during 2023, analysts said, has led to valuations becoming a challenge now. At 27x one-year forward price-to-earnings (PE), the Nifty MidCap100 index trades at 35 per cent premium to its average valuations. This is against a less than 20 per cent premium for the Nifty50.
As India’s relative positioning is still light in emerging market (EM) portfolios, the rising size is making Indian markets much more relevant for global mandated funds.
Thus, structural positives such as the expected political stability, rising investment cycle, multi-year growth visibility, and peaking of the dollar may drive higher foreign flows into large-caps in 2024.
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Published: 03 Jan 2024, 04:12 PM IST