Mutual fund inflows, retail interest fuelling flight to smallcaps

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Over the last nearly two years there has been a rush toward smallcap stocks indicated by a rising shareholding in such stocks by retail investors and mutual funds, partly due to increasing inflows in smallcap funds and partly due to curbs on trading in derivatives.

The retail shareholding in Nifty smallcap 100 stocks rose 16 per cent at the end of September 2024 from 15.4 per cent at the end of March 2023, according to HDFC Securities. In the same period the holding by mutual funds in smallcap stocks rose 10.9 per cent from 10.1 per cent. Interestingly the holding by foreign portfolio investors slipped 15 per cent from 15.3 per cent.

The Niftysmallcap100 index has rallied over 27 per cent over a one-year period.

The run toward smallcap stocks has been partly fuelled by heavy inflows into smallcap mutual funds, explained Deepak Jasani, Head of Retail Research at HDFC Securities. Mutual funds have to invest the money that is coming into such schemes. In fact, smallcap funds saw the heaviest monthly inflow in November 2024, in the last 13 months.

According to AMFI data, ₹4112 crore flowed into smallcap schemes in November, up 9 per cent on month.

Another aspect to the flight to smallcap stocks is due to shift of trading volumes from index derivatives to the smallcap cash market, said Yes Securities. To safeguard investor interest and speculative trades in index derivatives, Sebi has increased the minimum contract size and mandated upfront collection of option premiums.

“We sense that investors are increasingly focusing on small-cap opportunities, given the broader price resilience in these stocks compared to their large and mid-cap counterparts over the last three months,” it said.

Within the smallcap segment the sectors that are driving the cash market volumes are autos, capital goods, diversified and real estate. “These sectors have shown renewed momentum, attracting investor participation and benefiting from the broader market’s shift toward smaller stocks,” Yes Securities pointed out.