Nippon India MF, ICICI Prudential MF and HDFC MF has registered an increase in time taken to liquidate 50 per cent and 25 per cent of small-cap investment as their assets under management swell in April on the back of consistent inflows and rally in the market.

The inflows in the small-cap funds was up at ₹2,209 crore last month against an outflow of ₹94 crore in March as investors chased higher return despite capital market concern on froth in the small-cap space. Similarly, inflows in mid-cap also increased to ₹1,793 crore against ₹1,018 crore in March.

The BSE Small Cap index had gone up 10 per cent last month to 47,316 points against 43,166 points in March.

Concerned about significant inflows, the capital market regulator SEBI directed the Association of Mutual Funds in India to instruct all small- and mid-cap mutual funds to conduct stress tests to assess their liquidity positions and update their findings every 15 days, starting March 15. The purpose of this exercise was to inform investors about the investment risks associated with these schemes and enable them to make informed decisions. Several large fund houses have already ceased accepting lump-sum investments in small-cap schemes, opting instead to accept funds solely through the systematic investment plan route.

Volatility, valuations

Nirav Karkera, Head of Research at Fisdom, noted that many investors acknowledge the historical outperformance of small- and mid-cap segments compared to large-cap counterparts over extended periods. Also, there seems to be a significant evolution in aggregate investor maturity over the past couple of years. “Given the positive experience there seems to be a broad increase in risk appetite. Investors have accepted volatility as a characteristic of the market and using the high levels of volatility as an opportunity to gain profit. A combination of these factors are driving interest in small- and mid-caps,” he said.

Advising a cautious approach, Sreeram Ramdas, Vice-President, Green Portfolio, said given the valuation of small-cap index and the limited valuation cushion offered by the markets at this point investors should take investment decision based on their risk appetite.

The investable lot of small-cap stocks are not able to accommodate the large influx of capital from mutual funds as the promoter holding in small-cap companies ranges from 50-75 per cent and this reduces the free float liquidity in these counters, he added.