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Besides cash, many smallcap schemes are holding huge quantum of largecap stocks.

The deployment into largecap stocks by smallcap funds began from May 2022 and continues to expand, showcasing the fund managers' concerns on the smallcap space, as per a report by Elara Securities.

Currently, 6 per cent of total smallcap AUM is deployed into largecap names (previous high was seen in April 2019).

A similar trend was seen where smallcap funds were moving into largecaps from January 2018 to April 2019.

"However, during that period, we also saw smallcap stocks underperforming largecap, hence the move was supportive to their positioning. This time, due to the direct retail participation in smallcap space, we are seeing a strong outperformance in the smallcap index. This is hurting the performance and has potential of creating a panic among smallcap fund managers if this trend fails to reverse," the report said.

As of October 23, smallcap schemes are holding Rs 15,500 crore (7.8 per cent) of cash and Rs 12,500 crore (6.3 per cent) of largecap stocks.

Average cash levels since 2018 in smallcap schemes is around 6.6 per cent, indicating excess cash of 1.2 per cent.

Likewise average largecap holding in smallcap schemes since 2018 stands at 4.4 per cent, an excess of 1.85 per cent.

This translates into excess of Rs 6,100 crore (cash + largecap), which needs to be deployed to reach back to long-term average.

Add to this the consistent inflows into small cap schemes even now. The performance of small cap index is still not willing to reverse. Post the Israel-Palestine conflict that started in October, FMs had some hope of smallcap underperformance, but the strong revival after that is again creating pressure, the report said.