market capitalization—is an excellent example of it. Data published recently by the Association of Mutual Funds in India—the mutual fund lobby—tells us that the number of folios of small cap equity mutual funds (MFs) as of August had shot up to 13.85 million, a jump of a little over 27% from March. To put it another way, more than a fifth of the investment folios of small cap MFs that are currently in existence were created during this financial year.
Now, to give a sense of comparison, the number of folios of equity MFs on the whole rose by only 6.6% to 104.78 million during that period. If one takes a look at large cap MFs, the overall number of folios has barely moved from 12.97 million at the end of March to 13 million at the end of August. Large cap MFs largely invest in large cap stocks—or stocks ranked in the top 100 on the basis of market capitalization.
Even other types of equity MFs haven’t seen the same kind of jump in popularity as small cap MFs recently have. Let’s take the case of midcap MFs: between March and August, the number of folios of these funds went up 9.5% to 11.63 million. Midcap MFs largely invest in midcap stocks—stocks from rankings 101 to 250 in terms of market capitalization.
So, clearly there is a great fascination with investing in small cap stocks right now and many retail investors are doing that indirectly through equity MFs. What explains this popularity? Between March and August, the BSE SmallCap Index has rallied by a huge 37.8%. During that period, the BSE Sensex—which is a large-cap index and India’s most popular stock market tracker—gave a return of around 14.4%, a fantastic figure for a period of five months, but one that pales in comparison with the return given by small cap
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