Small-cap popularity not a sign of rising risk appetite: Experts

financialexpress.com:

Investors are getting smarter, not necessarily ‘adventurous’. That’s the reading by experts in the mutual fund industry, in light of the rising inflows into small-cap funds.

Net inflows into small-cap funds came in at Rs 4,495 crore in October, a substantial increase from the previous month’s Rs 2,678 crore, showed data released by the Association of Mutual Funds in India (AMFI) last week.

However, the point to note was that the average AUM (assets under management) of the small-cap category crossed the Rs 2-trillion mark for the first time.

Not surprising, say market players, given that the stellar rally in the small-cap index witnessed this year. The BSE SmallCap index has returned 36.2% in the past one year. On a year-to-date basis in 2023, it has returned 36.4%.

In comparison, the benchmark Sensex has delivered 6.5% in the past one year and 8.5% YTD in 2023.

This begs the question: Are investors taking more risk in return for higher returns?

Some say that is not the case, given that bulk of the money comes via SIPs (systematic investment plan).

Dhirendra Kumar, founder-CEO of Value Research, says that the large-cap universe has a smaller pool, while the small-cap universe has a pool of 1,500 companies.

“This gives fund managers a larger pool to choose from, and they can add more value. Lump-sum investments are reducing, while SIPs are on the rise, which help reduce risk. Investors also tend to invest more in these when markets correct,” he said.

Small-cap funds do carry a higher risk factor, but not all investors entering these are necessarily taking undue risk, say others.

“There are different types of investors. While hybrid funds and multi-asset allocation ones make sense for first-time investors, experienced ones