India’s mutual fund flows are increasingly reflecting a market where investors are looking beyond traditional large-cap leaders. While large-cap schemes have seen consecutive outflows, mid- and small-cap funds continue to attract strong money, supported by expectations of broader earnings growth and sustained SIP participation. But the shift is not necessarily a wholesale exit from large caps.
In an interview with BW Businessworld, Saugata Chatterjee, President and Deputy CEO, Nippon India Mutual Fund, says the current trend represents a broadening of allocation across corporate India, with investors seeking opportunities across market capitalisations rather than replacing one segment with another.
Edited excerpts:
Are investors genuinely shifting from large caps to mid and small caps?
Recent flows indicate stronger investor interest in mid- and small-cap funds, reflecting wider participation in opportunities across corporate India. This is best viewed as a broadening of investor allocation rather than a move away from large caps. India’s growth opportunity extends across market capitalisations—large caps offer scale, resilience and established leadership, while mid and small caps provide participation in emerging businesses and new areas of growth.
Ultimately, the focus should remain on identifying the right companies and maintaining balanced portfolios, rather than viewing one market segment as replacing another.
Are weak earnings in BFSI and IT driving the recent large-cap outflows?
The large part of the outflows in BFSI can be attributed to the sustained selling by foreign institutional investors (FIIs). The sector accounts for approximately one-third of the large cap indices and hence impacted significantly by the sharp FII outflows.
In case of IT worries over growth of the domestic IT services in wake of the AI implementation shaped the investor behaviour. Also global capital shifted from outsourcing/services (Indian IT) to AI Hardware/ Semiconductor manufacturers (Taiwan, South Korea)
Can mid and small caps sustain their strong inflows at current valuations?
Sustained strong inflows in both the categories have coincided with the strong earnings outlook for the broader markets and sharp outperformance versus large caps over the last few months. We believe investors are looking at these segments with a long-term view given the better earnings outlook and utilising the systematic route to participate in the same. Given the SIP anchoring to these flows, there may better sustainability over the medium term.
Are investors underestimating the risks of chasing growth themes such as AI?
Investor enthusiasm around AI reflects its significant long-term growth potential, but current positioning also carries valuation and execution risks. Elevated expectations, heavy capital expenditure and concentration in a relatively small group of technology companies mean future earnings will need to justify substantial investment.
Do record SIP flows indicate greater investor discipline despite market volatility?
Record SIP flows suggest that investors are becoming more consistent and disciplined in their approach to equity investing, even during periods of market volatility. Continued monthly contributions indicate a growing willingness to stay invested rather than react to short-term market movements. This trend is being supported by higher financial awareness, wider mutual fund participation and the convenience of automated investing. While category-level movements show that investors are still actively adjusting their portfolios.
What is driving the rising interest in gold and silver ETFs?
Rising demand in gold and silver ETFs is being driven by a combination of persistent geopolitical uncertainty, strong momentum and diversification needs. Inflation concerns and currency volatility have also increased gold’s appeal as a portfolio hedge. Silver is benefiting from the same macro factor, while also gaining support from industrial demand. ETFs also offer investors a convenient, liquid and transparent way to gain exposure without holding the physical metal.
Could diversification into commodities become a larger part of retail portfolios?
Retail portfolios in India are entering a more evolved phase, with commodities becoming an important component of broader asset allocation. Sustained flows into multi-asset allocation funds reflect the growing preference for combining equities, fixed income and commodities within a single portfolio.
Winners keep changing every year, and a multi-asset approach enables investors to participate across these changing leadership cycles. The growing acceptance of this category is a positive development for the industry and can support more balanced, long-term investment journeys for retail investors.
Where do you see the best risk-reward across large, mid and small caps over the next 12-18 months?The market consolidation over the last 24 months has led to better valuations. This coupled with improvement in corporate earnings despite the global headwinds offers reasonable opportunities across all market cap segments. In our view they key investment decisions is identifying good caps (better growth available at rational valuations) versus bad caps, as the investment scope is across market caps.
In simple terms diversified categories like multi Cap, flexicap, large and mid cap etc can be considered by long-term investors with appropriate risk appetite, while using SIP way to participate in SMID funds.