The last three months performance is against the one-year returns, which is still in red
Small cap funds seem to have started on a recovery path returning roughly 3.68 percent over the last three months compared to the over 16 percent negative return in the last year.
Funds investing in small-cap stocks were the worst hit across all mutual fund categories over the last year, according to the data on the mutual fund research website, Value Research. In comparison, the S&P BSE Small Cap Index fell 21.31 percent.
SEBI’s re-categorisation of mutual fund schemes was one of the key reasons for the hit. SEBI in October 2017 recategorised and rationalised MF schemes to enable investors to make accurate comparisons.
Among other reasons for the underperformance, fund managers also pointed out the valuations of small-cap funds had turned expensive early on in the hope of profit recovery. However, as earnings did not meet expectations, stocks took a tumble, impacting returns.
After the correction in 2018 and 2019 so far, valuations now seem fairly attractive drawing strong institutional flows. This has led to recovery over the last three months, they said.
“SEBI’s re-categorisation is one reason, another is valuations. Small cap stocks were expensive on the expectation of recovery in profits which did not happen so stocks underperformed,” said Viral Berawala, Chief Investment Officer, Essel Mutual Fund.
Foreign institutional investors (FIIs), have poured in more than Rs 40,000 crore in Indian markets in the March quarter. FIIs were net sellers in the December quarter, selling assets worth approximately Rs 17,000 crore.
Banking, pharma and technology funds were the only categories to deliver positive returns over the last year, but in the last three month, technology and pharma funds were in the red.
Debt funds outperformed several small, mid and large-cap equity funds in the past year.
According to Value Research, Debt: Long Duration registered the highest average return of 8.92 percent, followed by Debt: Gilt mutual funds that invest in a mix of government securities of varying maturities at 8.49 percent in the one-year period ended May 10.
Fund managers attributed outperformance of gilt funds and long duration debt funds to a sharp rally in yields after rate cuts by the Reserve Bank of India (RBI). Since August last year, RBI has cut the repo rate -- the rate at which banks borrow short-term money from the central bank -- by 50 basis points collectively in two separate policy actions. The repo is now at 6 percent.
Liquid funds used by corporates to park surplus cash delivered 6.93 percent average returns in the review period.
In the three months, all debt fund categories had positive returns in the range of 1.95-1.99 percent.Asset managers said due to the recent issues with Non-Banking Financial Companies (NBFCs) and credit risk funds, investors were seeking safety in central government securities.Not sure which mutual funds to buy? Download moneycontrol transact app to get personalised investment recommendations.
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