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Mid and small cap funds accounted for 59 per cent of assets under management (AUM) and 87 per cent of flows in FY24, global brokerage firm Jefferies said.

Midcap and Small Cap index outperformed Nifty by 28 percentage points and 34 percentage points respectively in FYTD24 (i.e. Since April, 2023) driven by strong inflows into the Mid and Small fund category which accounted for 87 per cent of the total inflows into the Large, Mid, Small and Large and Mid category combined (FY23 71 per cent), the brokerage said.

The AUM now represents about 59 per cent of the total Mutual Fund AUM in the SMID categories (53 per cent Mar'23). Small Cap funds has seen a much higher increase in its AUM share since Covid low which is up 10ppt (from 13.9 per cent to 23.7 per cent) compared to Midcap funds which is up 5ppt (30.2 per cent to 34.8 per cent) since then.

Inflows in SMID cap schemes are moderating but activity levels are high. Though mutual fund flows into SMID cap categories saw a surge this year, they have started to moderate sequentially with flows in small cap fund down from 71 per cent of total flows in Apr-Jun'23 quarter to 35 per cent in Jan-Feb, 2024 still 7ppt above its 5yr average, the brokerage said.

Midcap fund flows on the other hand are back to 5yr average at 33.5 per cent.

The volume in the Midcap and Small cap space remains elevated with Midcap volume relative to Nifty is at its peak seen in late 2018 and 2022 while Small Cap index volume much above peak signaling some potential for more correction driven by normalisation of volumes, Jefferies said.

"We believe that Small/Mid cap which has already seen 12 per cent/7 per cent correction from its peak in Feb'24 might see some pain due to ongoing regulatory tightening," the brokerage said in its report.