Large cap schemes are back on investor radar amid rising market volatility

The tide seems to be slowly turning in favour of large cap mutual fund schemes amid high valuations of mid and small cap schemes. The large funds have once again started gaining traction after a series of outflows in the previous few months. According to the data from the Association of Mutual Funds in India (AMFI), the large-cap schemes reported an inflow of Rs 723.8 crore in October 2023 on the back of outflows worth Rs 5,751 crore in the five months to September.

The mid-cap and small-cap schemes have been attracting increasing inflows over the past two years. These schemes have attracted funds worth Rs 52,000 crore while large-cap schemes have garnered inflows of Rs 16,580 crore since January 2023 so far.

A major trigger for the rising popularity of small and mid cap schemes is their superior returns. According to the data from mutual funds research firm Value Research, the average return generated by the large-cap schemes category was 18.2% in the past three years. In comparison, returns of mid-cap and small-cap schemes were higher at 28.2 and 35.3% respectively. Even in a shorter time frame of the past one year, with 9.6% return, the large-cap schemes lagged far behind the mid-cap and small-cap counterparts which generated returns of 22.3% and 28.1% respectively. Bottom-up stories which held the promise of high earnings’ growth worked in the favour of mid-and-small-cap stocks.

However, in the past three months, a sentiment of caution has emerged in the markets amid rising volatility and higher geopolitical tensions. This is pertaining to two things. One is the high valuation of mid-and small-cap stocks. At present, according to the data compiled by ETIG, the Nifty 100 index, which contains prominent large-sized companies, has a price-earnings (P/E) multiple of 21.3. On the other hand, the Nifty Smallcap 100 and the Nifty Midcap 100 indices have P/Es of 25.6 and 22.4 respectively.

The second factor is the uncertainty surrounding the state and general elections over the next few months. This has promoted some of the mutual fund distributors to believe that flows in the large-cap funds may increase further in the coming months as investors turn risk averse. Besides, there is uncertainty about the interest rate trajectory to be followed by the RBI as well as the global central banks. If interest rates remain high for a prolonged period, it may lead to higher volatility. Given these factors, the large-caps, which offer relatively higher “margin of safety” than the mid-and-small-caps, may attract high attention from long-term investors.