Retail investors overlook stretched valuation concern; invest en masse in small caps

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It looks like retail investors have forgotten Sebi’s warning on stretched valuation of small cap and mid cap stocks. Shredding all the apprehension that they had shown in March 2024, they have invested big time in small cap funds in April 2024. In just the preceding month, when, Sebi had given its call, small cap funds had reported outflow of funds after a very long time. But now, in April 2024, small cap funds have again reported huge inflows of Rs 2,208 crore coming from small investors.

The fund category had reported funds outflow of Rs 94 crore in March 2024. Consequently, the S&P BSE SmallCap index had surged six per cent in April. While, S&P BSE 250 SmallCap Index had also surged by similar percentage in the concerned month.

The share of small cap mutual fund folios is also highest in total number of folios that they have opened in whole of equity mutual funds category. As of April 2024, small cap funds folios’s share stand at 15 per cent. There are total number of 12.55 crore equity mutual fund folios. While, there are 1.94 crore small cap mutual fund folios. And there are total of 16 crore folios in the mutual fund industry.

Small cap funds have seen huge inflows in last one year or so. Along with thematic funds, this particular category of funds has seen maximum inflows in as many days. As a result, AUM of small cap funds has swelled 87 per cent to Rs 2.66 lakh crore in April 2024 from Rs 1.42 lakh crore in April 2023. During the same time, AUM of equity funds as a whole has gone up by 56 per cent to Rs 24.74 lakh crore in April 2024 from Rs 15.84 lakh crore in the year ago period.

In fact, investment in equity mutual funds has been positive continuously since March 2021. Since then, not a single month has gone by where outflow of funds from equity mutual funds has been witnessed.