NFOs, lower redemptions trigger a near three-fold rise in flows in large-cap schemes

In previous conversations with Moneycontrol, fund managers had highlighted that large-cap funds are often seen as stabilisers during volatile times, offering stability and credibility that small-caps cannot typically match.

New fund offers (NFOs) and lower redemptions played a key role in the spike in inflows in large-cap mutual fund schemes, which saw a near three-fold rise in the net flows in August even as experts suggest it is too early to conclude a shift in investor behaviour or preference.

In August, large-cap scheme saw net inflows to the tune of Rs 2,637 crore, a 293 percent increase as compared to July, as per data from the Association of Mutual Funds in India (AMFI).

Further, in terms of returns, the large-cap equity category’s three-year return stands at 16.72 percent, with the five-year return and ten-year return pegged at 20.26 percent and 13.12, respectively.

Also read: Five highlights for equity markets from AMFI's latest data

The benchmark BSE 100 Total Return Index, however, performed slightly better at 16.6 percent over three years, 20.89 percent over five years, and 14.09 percent over ten years.

Experts, meanwhile, believe that despite the growth, challenges persist, particularly, with retail investors favouring mid- and small-cap funds.

“Retail money is still largely going towards mid- and small-caps, though that is starting to change. When global markets correct, large-caps tend to be the first to be sold by foreign investors, which could pose some risks,” said Sumit Agrawal, Fund Manager, Bandhan AMC.

“In the last five to six months, we have seen continuous inflows into large-cap funds. This time around, the numbers are quite healthy, especially when you combine them with inflows from index funds,” Agrawal added while highlighting the positive momentum in the large-cap space.

This trend, he said, seems to reflect a shift among asset allocators towards reducing risk by increasing large-cap exposure. “Incrementally, a lot of money is now finding its way to large caps. Most distributors and asset allocators are publicly advocating reducing risk and increasing exposure to large caps," he said.

Agrawal's large cap fund has outperformed its benchmark for several years. "Our fund has performed phenomenally well. Over six out of eight years, we’ve delivered alpha versus the benchmark. Even on a five- or seven-year basis, we’re giving a 2-2.5 percent alpha," he said.

Similarly, Manuj Jain, Associate Director and Co-Head of Product Strategy at WhiteOak Capital AMC, said that gross inflows into large-cap funds have averaged around Rs 6,500 crore this month – a surge largely attributed to an NFO launched by Bajaj Finserv in the large-cap space.

“Outflows have decreased, contributing to the higher net inflow. The net inflow is Rs 2,600 crore, compared to the previous three-month average of Rs 760 crore, which is predominantly due to lower redemptions,” said Jain.

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In previous conversations with Moneycontrol, fund managers had highlighted that large-cap funds are often seen as stabilisers during volatile times, offering stability and credibility that small-caps cannot typically match.

Manish Mehta, national head, sales, marketing and digital business, Kotak Mutual Fund, attributed large-caps' appeal to better valuations as well as communication with investors and distributors.

"It's only after repeated communication that we began seeing mid- and small-cap flows slow down over the past few months," Mehta said, adding that the mid- and small-cap segments have been considered overvalued for some time but investor action typically lags. Now, large-cap funds are gaining momentum as investors seek stability.

Over a one-year period, the benchmark index Nifty 50 has gained around 26 percent.

Overall amongst large cap stocks, according to a Nuvama report, significant buying was seen in Zomato, TCS, Trent & Maruti Suzuki, while highest selling was seen in HDFC Bank, Reliance Industries, Apollo Hospitals and Infosys. Many of the funds also saw complete exits from the Adani Enterprises stock.

Looking ahead, experts expect diversification to remain a key theme among investors as valuation-conscious investors are also showing increased interest in large-caps.

“From a valuation perspective, large-caps are better positioned compared to small- and mid-caps. Over the last few months, we’ve seen some investors allocate money to large-caps," Agrawal commented.

Kaustubh Belapurkar, Director of Research at Morningstar, added that while the focus has shifted to mid- and small-caps, large-caps have not underperformed.

“The conversation tends to be around large-caps not working anymore, but they haven’t done badly at all. It’s just that the focus has shifted, and fresh money isn’t flowing into large-caps," he said. He also highlighted that large-cap index funds are still attracting consistent inflows, with Rs 4,000-5,000 crore coming in regularly.

Belapurkar further explained that the market’s current inclination toward small- and mid-caps isn’t necessarily permanent. “Unless there’s a reasonable correction, the increased allocation towards small- and mid-caps may not go away,” he said, suggesting that if small- and mid-cap valuations correct, the focus could shift back to large-caps.

Agrawal added that large-cap valuations remain attractive compared to other segments. “Valuations are quite okay in large-caps. Unlike mid-caps, which are expensive, large-caps are relatively cheap. That’s why we’re seeing a lot of money flowing into this space,” he said.