Are Retail Investors Moving Away from Small Mid-Cap Stocks to Large-Caps Amid Market Volatility?
Small MidCap Stocks : Retail investors in India have long favored mid- and small-cap stocks for their growth potential and relatively lower trading prices. However, recent trends suggest a shift toward large-cap stocks as market volatility and weak earnings make smaller stocks riskier.
Increased market turbulence, influenced by both domestic and global factors, has made mid- and small-cap segments more vulnerable to sell-offs. Investors, reacting cautiously, have reduced their participation in these segments, reflected in declining trading volumes, delivery volumes, and even new demat account openings.
The mutual fund industry has also experienced this shift. Equity mutual fund inflows declined for the second consecutive month in February, with small- and mid-cap funds witnessing sharp reductions in investments. While large-cap funds also saw lower inflows, the decline was not as significant.
Retail Investors Turn Cautious Amid Market Uncertainty
Retail investors have increasingly relied on systematic investment plans (SIPs) for long-term wealth creation. However, inflows through the SIP route fell to ₹25,999 crore in February, a three-month low, down from ₹26,400 crore in January. The SIP assets under management (AUM) also dropped to ₹12.38 lakh crore from ₹13.19 lakh crore. The sharp rise in SIP stoppage—123% in February, up from 109% in January—suggests investors are becoming more risk-averse.
Mutual Fund Inflows: Small & Mid-Cap Segments Under Pressure
According to data from the Association of Mutual Funds in India (AMFI), inflows into mid- and small-cap funds saw a significant decline in February.
| Fund Category | Inflows in January (₹ crore) | Inflows in February (₹ crore) |
|---|---|---|
| Small-Cap Funds | 5,720 | 3,722 |
| Mid-Cap Funds | 5,147 | 3,406 |
| Large-Cap Funds | 3,063 | 2,866 |
While large-cap funds also saw a dip in inflows, the fall was much milder than in the mid- and small-cap categories.
Why Are Investors Moving Toward Large-Caps?
Analysts attribute this shift to valuation concerns and market stability. Despite recent corrections, mid- and small-cap stocks are still considered overvalued.
“Large-cap stocks currently offer attractive valuations; they also provide greater stability compared to mid- and small-cap stocks, especially during periods of market volatility. Their lower risk profile and established market position make them a reliable choice for investors seeking long-term resilience in uncertain market conditions,” said Nehal Meshram, Senior Analyst—Manager Research at Morningstar Investment Research India.
Large-cap stocks generally belong to well-established companies with proven business models. These companies tend to be more resilient during economic downturns, making them a preferred choice for investors seeking safety in uncertain times.
Small & Mid-Cap Funds Have Seen Massive Growth Since 2020
Despite the current pullback, small- and mid-cap segments have witnessed massive growth over the past few years. The AUM of small-cap funds surged to ₹3.30 lakh crore by the end of 2024—six times higher than in January 2020. Similarly, the AUM of mid-cap funds has increased fourfold to ₹4 lakh crore over the same period.
What Lies Ahead?
While large-cap stocks are gaining traction, mid- and small-cap stocks still hold long-term potential. Investors should evaluate their risk tolerance and investment horizon before making allocation decisions. A balanced approach, diversifying between large, mid, and small caps, may help mitigate risks while capturing growth opportunities.
Q&A Section
1. Why are investors shifting from mid- and small-cap stocks to large-cap stocks?
Investors are moving toward large-cap stocks due to increased market volatility, weak earnings, and high valuations in mid- and small-cap stocks. Large-cap stocks offer more stability and are seen as safer investments during uncertain times.
2. How have mutual fund inflows been affected?
Equity mutual fund inflows declined for the second consecutive month in February, with small- and mid-cap fund investments seeing the most significant drop. While large-cap fund inflows also decreased, the impact was less severe.
3. Are investors withdrawing from SIPs as well?
Yes, inflows through the SIP route fell to ₹25,999 crore in February, a three-month low. The increase in SIP stoppage rates indicates a cautious approach among investors.
4. What makes large-cap stocks more attractive during market volatility?
Large-cap stocks belong to well-established companies with strong fundamentals and lower risk profiles. They tend to be more resilient during market downturns, making them a preferred choice for risk-averse investors.
5. Have small- and mid-cap funds lost their long-term growth potential?
No, despite the current pullback, small- and mid-cap funds have witnessed massive growth over the past few years. However, investors should carefully assess valuations and risks before investing.
6. What should investors do now?
A balanced portfolio with exposure to large, mid, and small caps can help mitigate risks while maximizing returns. Investors should consider their risk tolerance and investment goals before making any allocation decisions.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.