Small And Mid Cap Rally: Be Wary

You may include small- and mid-caps in your portfolio for diversification, but understand that they may not replicate last year's returns and are relatively more volatile

- JOYDEEP SEN

Returns from small-cap and mid-cap (SMID) stocks, and funds based on them, have been superlative for a while. That is good for existing investors. However, this also calls for a reality check on expectations going forward. There is an expectation building up among a section of investors that the returns delivered over the last year will be repeated next year, too. But that is where one needs to check facts.

Market Cap And AUM

As of the end of February 2024, the assets under management (AUM) of large-cap mutual funds was ₹3.06 lakh crore. As on that date, the AUM of mid-cap funds was ₹2.96 lakh crore, while that for small-cap funds was ₹2.49 lakh crore. Hence, the combined AUM of SMID was ₹5.45 lakh crore, about 1.78 times than that of large-cap funds. A year ago, at the end of February 2023, it was ₹3.14 lakh crore for SMID funds and ₹2.35 lakh crore for large-cap funds, which is about 1.34 times. This shows that there has been a run-up in the AUM of SMID funds.

Now, let us look at market capitalisation. Data on market capitalisation from the Association of Mutual Funds in India (Amfi) shows us that in the six months ended December 2023, the total market cap of large-cap stocks was ₹207 lakh crore, while that of mid-cap and small-caps was ₹57 lakh crore each. The combined market cap of SMID at ₹114 lakh crore is 55 per cent of the large-cap market cap of ₹207 lakh crore. To put it simply, in mutual funds, the AUM of SMID is almost double (1.78 times to be precise), but the market cap of SMID is half (55 per cent to be precise) of large-cap stocks. This indicates there is a skew in mutual funds, in terms of investor preference for SMID over one year.