Small cap mutual funds received an inflow of Rs 34,223 crore in the calendar year 2024 against an inflow of Rs 41,035 crore in the calendar year 2023. The category contributed 9% to the total inflows in equity mutual funds of Rs 3.94 lakh crore in CY24.

In the calendar year 2024, the small cap funds received the highest inflows in December of Rs 4,667 crore and registered a growth of 14% on a month on month basis against an inflow of Rs 4,111 crore in November.

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The total assets under management (AUM) of small cap funds was recorded at Rs 3.29 lakh crore as on December 31, 2024 and in the calendar year it went up by 33% from Rs 2.47 lakh crore in January 2024.

The small cap funds have offered an average return of 26.38% in CY24 with Motilal Oswal Small Cap Fund offering the highest return of around 45.47% in the same period. ICICI Prudential Smallcap Fund gave the lowest return of around 15.03% in CY24.

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Around 61.38 lakh folios were added in the small cap category in the calendar year 2024 from 1.78 lakh crore in January to 2.40 lakh crore in December. As on December 31, 2024, there were around 29 schemes in the small cap category.

During the year, small caps created most buzz due to the valuations and the froth which was created in the segments due to continuous inflows. When the market regulator believed that there was froth building in the mid and small cap segments, the mutual fund houses were asked to frame a policy which contains appropriate and proactive measures to protect investors.

In response to Sebi, mutual fund houses started declaring stress test results for these funds that will include the total time required to liquidate 50% and 25% of the portfolio.

According to Chethan Shenoy, Director & Head – Product & Research, Anand Rathi Wealth Limited, when it comes to valuations mid cap and small cap have slightly placed at a modest froth compared to the large cap segment due to high earnings expectations for the second half of FY25.

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Overall, the data suggests no major froth in the equity markets currently, and valuations appear reasonable across the categories.

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Commenting on the outlook for these funds, Chethan Shenoy, Director & Head – Product & Research, Anand Rathi Wealth Limited said that in H1FY25, corporate earnings were slightly slowed down due to the high base effect of the previous year, but we can expect an acceleration in earnings growth in the second half as driven by a favorable base effect and the Absence of some of the negative one-offs witnessed in the first half.

“For a full year FY25, we are expecting corporate earnings of mid & small-cap to grow at 20 and 22%, respectively. For CY2025, the mid & small-cap outlook is positive. However, we recommend that investors diversify across the market caps, such as large, mid, and small, at 55:20:25.

This will help to get exposure across the market caps and reduce the concentration risk associated with any single market cap,” he further added.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)