Mutual Fund Flows - Newspaper Summary

 The sources highlight a significant trend in the Indian financial market where domestic mutual fund (MF) inflows are heavily skewed towards Mid- and Small-cap schemes, occurring despite challenging external macroeconomic factors and the high valuations of these market segments.

Here is a detailed discussion of the Mutual Fund Market Trends concerning Mid- and Small-cap categories within the broader investment landscape:

1. Robust Inflows Despite Cautionary Market Context

The strong flow of domestic capital into mid- and small-cap funds is notable because it runs counter to prevailing market headwinds:

• Challenging Global and Domestic Backdrop: The Indian market overall is characterized by challenging global cues, including penal trade tariffs hitting exporters, geopolitical tensions, and strong foreign money outflows.
• Foreign Institutional Investor (FPI) Behavior: Foreign Portfolio Investors (FPIs) are observed to be continuing a selling spree. In contrast, domestic investors are exhibiting an "increased risk appetite" by pouring money into the smaller cap segments.
• Quantitative Data on Inflows: Over the 12 months leading up to August 2025, small-cap schemes received ₹93,499 crore in gross inflows, resulting in ₹51,874 crore in net inflows (after redemptions). Mid-cap mutual funds received similar amounts, with ₹93,287 crore gross and ₹50,174 crore net inflows.
• Contrast with Large-Caps: This activity contrasts sharply with the large-cap segment, which received only ₹68,105 crore in gross inflows and a much lower ₹28,766 crore in net inflows during the same period, suggesting that investors were selling large-cap funds more aggressively than mid- or small-cap funds.

2. High Valuations and Investor Risk Appetite

A core finding is that investors appear willing to overlook high valuations when investing in these categories:

• Elevated Price-to-Earnings (PE) Multiples: As of August 2025, the Nifty Small Cap 250 TRI trades at a PE multiple of 31.5, and the Nifty Midcap 150 TRI trades at a PE multiple of 32.1.
• Discount in Large-Caps: In stark contrast, the large-cap Nifty 100 TRI trades at a PE of 21.3. This means the mid- and small-cap benchmarks trade at a significant premium to their large-cap counterparts.
• Investor Sentiment: The decision by investors to "plough in money at elevated valuations indicates increased risk appetite and a belief that returns will come in the long term".
• Impact of IPOs: The entry of mid- and small-cap companies through Initial Public Offerings (IPOs) at high multiples, which are subsequently included in the indices, may have contributed to the overall increase in benchmark valuations.

3. Performance and Risk Mitigation by Active Funds

Despite the broader indices experiencing market corrections, active mutual fund management has demonstrated resilience:

• Index Performance (1-Year): In the last one year, the Nifty Small Cap 250 index fell the most (7.4 per cent), followed by the large-cap index (4.4 per cent), and the Nifty Midcap 150 index (3.8 per cent).
• Active Fund Outperformance: Active funds, especially in the mid- and small-cap categories, have managed to contain the downsides better than their underlying indices in a turbulent year.
  • Active small-cap funds fell by an average of only 4.8 per cent (compared to the index fall of 7.4 per cent).
  • Active mid-cap funds declined by only 3.2 per cent (compared to the index fall of 3.8 per cent).
• Investment Route: Since many small-cap funds have closed lumpsum investments, most investors are likely taking exposure via the Systematic Investment Plan (SIP) route.

4. Strategic Recommendations for Investors

Given the high valuations and risk in the smaller cap segments, the sources advocate for a cautious, diversified approach:

• Exercise Caution: Investors are advised to "exercise caution with mid- and small-cap funds".
• Portfolio Tilt: Building a balanced long-term portfolio should feature a greater tilt towards large- and flexi-cap mutual funds.
• Large-Cap Comfort: With small- and mid-caps trading expensively, large-caps are seen as offering "relative comfort". For instance, large-cap companies like Samvardhana Motherson International (SAMIL), despite being susceptible to global slowdowns, offer a better margin of safety at lower levels, making accumulation on dips advisable.