India's equity markets saw a broad-based rally in 2023 with unprecedented flows into small- and mid-cap schemes. But with record flows into the categories and a limited basket to allot them in, fund managers had to rethink their strategies.
Turnover ratios for small and mid-cap funds reached as high as 600% as of January, according to data provided by Morningstar Inc. The ratio implies the percentage of a fund's assets that have been replaced in a year.
LIC MF Small Cap Fund recorded a turnover ratio of 684%, the most out of any small and mid-cap schemes, followed by the actively managed mid-cap schemes for the same fund house with a ratio of 559%.
Even among the limited basket of small and mid-cap stocks, fund managers allocated the record flows by increasing their holdings, with no notable rise in their cash holdings to signify difficulty in allocation.
Since small-cap and mid-cap funds invest in companies with relatively lower market capitalisation, their ability to absorb such flows also remains limited, according to Abhilasha Satale, fund manager at Quantum AMC.
Capping lumpsum flows into these schemes is one of the measures taken in order to ensure efficient allocation of funds, along with judicious investment of those coming from systematic investment plans without increasing sub-optimal positions and consolidating the fund positions, Satale told NDTV Profit.
Median holding in small-cap funds grew by six across 28 unique schemes, while for mid-caps, the count stood at nine across 29 unique schemes.
Among the small-cap category, Bandhan Small Cap Fund increased its number of holdings by 76 to over double the initial count.
For mid-cap schemes, WhiteOak Capital Mid Cap increased its unique holdings by 42 to cross triple digits at 112.
Small-cap funds recorded net inflows of more than Rs 41,000 crore in 2023, the most out of any equity-oriented category. Mid-cap funds saw net inflows of over Rs 22,900 crore, while there was a net outflow for large-cap funds of nearly Rs 3,000 crore.
Quant Small Cap Fund more than doubled its fund with inflows of Rs 8,116 crore during the year, the highest among any small-cap scheme.
Across mid-cap schemes, Kotak Emerging Equity Fund recorded highest inflows of Rs 6,260 crore.
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