SIZE DOES MATTER

EVEN AS SMALL-CAP MUTUAL FUND SCHEMES SEE RECORD INFLOWS WITH INVESTORS BETTING BIG ON THE SEGMENT, SOME FUND MANAGERS APPEAR WARY OF DEPLOYING MORE MONEY INTO SMALL-CAP STOCKS. IS THE PARTY OVER FOR THEM?

- ASHISH RUKHAIYAR

'SMALL IS BEAUTIFUL' or ‘the bigger the better’—which one do you think has the best value?

Now, imagine the possibility of purchasing a product that has grown to a very large size but still centres around things that are deemed small.

That’s the realm of small-cap funds, which invest primarily in small-cap stocks. Though these stocks are considered small in terms of market capitalisation, such has been the investor appetite for them that a few funds in the segment have become so large that deploying investor money has become a problem, forcing some fund managers to temporarily halt new subscriptions.

To understand why that is the case we need to first tackle a frequently asked question that always surfaces when the benchmark indices scale record highs: What is the outlook on the smallcap universe of stocks, especially when the small-cap barometer has outpaced the benchmarks, the S&P BSE Sensex and the broader Nifty 50? A bunch of fund managers reckons the recent rally and the resulting surge in valuations demand that they take a breather in terms of putting more money into such stocks that often encounter liquidity problems during hefty buy or sell orders.

Consider this: While the Sensex has gained 9.45 per cent so far in 2023, the S&P BSE SmallCap index has rallied 17.50 per cent through July 17. Interestingly, this comes on the back of a 1.80 per cent fall in the small-cap index in 2022, when the Sensex rose nearly 4.5 per cent.

This is noteworthy because many market watchers believe that a sharp increase in the value of small-cap stocks indicates that the rally is nearing its end, even though the Indian stock market is currently receiving strong support in the form of inflows from both foreign and domestic institutional investors.

Now, let’s talk about small-cap mutual fund schemes.