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In a rare turn of events, smallcap funds experienced a net outflow for the first time in two-and-a-half years in March. This outflow amounted to Rs 94.2 crore, marking a significant shift from the previous month's inflow of Rs 248.73 crore in September 2021. Similarly, midcap funds saw a 43% decline in inflows to Rs 1,017.69 crore, reaching multi-year lows.

This trend was influenced by the Securities and Exchange Board of India (Sebi) raising concerns about frothiness in certain small- and midcap stocks. Sebi directed mutual funds to conduct stress tests on their small and midcap portfolios, leading to a cautious approach among investors.

The outflow from smallcap funds and the slowdown in midcap fund inflows contributed to a 16% decrease in total net equity inflows, which amounted to Rs 22,633 crore in March.

Concerns over regulatory advisories and restrictions on inflows into smallcap schemes by various fund houses, such as Kotak MF and ICICI Pru Smallcap Fund, contributed to this decline.

However, in my view the smallcap outflow as an aberration is as insignificant in terms of its impact. The decline in the Nifty smallcap 250 index by -4.2% to 14,330.50 and in the Nifty Midcap 150 Index by -0.36% to 17,766 led to a rotation of investor funds into large caps. This resulted in large cap funds experiencing a net inflow of Rs 2,127.79 crore, reaching a 21-month high, and the Nifty 50 outperforming the midcap and smallcap indices.

There is a slight rotation in investor funds towards large cap and predominantly large cap funds like flexi cap or large and mid, citing relative valuation comfort as a driving factor.

Despite the March outflows, small-cap stocks showed strong performance throughout FY2024, with the Nifty Small Cap 250 index surging 63%, outpacing both the Nifty Midcap 150 (56.5%) and Nifty 50 (28.6%). This performance was reflected in the significant inflows into small-cap funds (Rs 40,188.55 crore) compared to mid-cap (Rs 22,226 crore) and large-cap funds (outflow of Rs 613.26 crore).

SIP flows hit a record high for the second consecutive month at Rs 19,271 crore in March, reflecting continued investor confidence in mutual funds. The industry also witnessed significant growth, with net AUM reaching a record high of Rs 53.4 trillion, a 35.47% year-on-year increase. The number of investor accounts (folios) also rose by 22% year-on-year to 177.8 million.

The decline in net inflows in March was driven by a shift in investor sentiment away from debt funds. Debt funds saw outflows of Rs 1.98 trillion, mainly due to quarter-end advance tax payments. Despite these challenges, the mutual fund industry remains optimistic about the future, with SIP accounts hitting a record high and investor evolution towards financial literacy.

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