There has been a lot of noise in the market related to Midcap and Small cap and stress test results and in many places even the regulators are scared for the one-way rally of the segment. But did we try to find out where the inflows of the largest Industry of Equity Investments - Mutual Funds portray the final picture? What is the impact of the Stress test how do you find the inflows to carry forward and where do you find the retail India to invest from the 5% Equity allocation to 6% or 7% level?
Did you check where you have to rebalance and reinvest in the Financial year 2024-25? Will you follow the herd of the market or will you search for unique opportunities for wealth creation?
Many investment advisors have given advice to invest in large caps and pull away from Mid and small caps. Few houses came up with the view of investing in Flexi cap rather than doing investments in Multicap and large caps. Then SEBI came up with some stress test numbers unreadable by investors and many financial advisors out of fear asked their clients to redeem their portfolio and shift into large caps and flexi caps.
The recent data of the AMFI speaks that Small Cap witnessed profit
booking whereas Midcap attracted inflows. The large-cap inflows were guided by
two factors 1) One the large-cap underperformance became an opportunity for
rebalancing from small-cap and midcap and 2)The large-cap rally will benefit from the Q4 results of FY-2023-24.
Now in between the Midcap and small cap space corrected by hopping and
lot of quality midcaps also corrected. Even though the indices have been
corrected by single digits, there are stocks in the market that have corrected
by more than 50% to 70%. Segments like cybersecurity, artificial intelligence
and emerging technologies hold growth potential for the information technology
sector. Hence one will find quality Midcap IT companies to grow and create
significant wealth in the coming years. If we look at the sector composition in
midcap and small-cap space, we will find the manufacturing sector has more
dominance. Now if the upcoming Indian GDP is focused towards manufacturing
growth making India less dependent on imports and more one exports, we are
bound to witness a major rally in midcap and small-cap space.
The biggest advice post-correction is that
now you do the reinvestments back into those midcap and small stocks and Mutual
Funds where you exited just a month before or a couple of weeks before.
Re-investment is one of the biggest hurdles in today’s market. In March over 50
stocks with a market capitalization above Rs 500 crore plunged by 25% to 65%.
Additionally, around 130 stocks have dropped by 20% to 25%.
If we look at the AMFI data we will find Large Cap inflows for FY-24 was
Rs.79694 cr compared to Midcap -Rs 113889 cr against Small Cap Rs 110317 cr.
The numbers speak loudly that the Mid and Small-cap inflow in FY-24 was much
higher and is still invested in the market and hence the valuation of the
stocks will never come down historically it has come down or even expected to
be down even in the worst nightmare. The strength of the Indian equity market
is completely in the hands of the retail investors.
The above data analysis does not include PMS or AIF. Flexi Cap,
Multicap or Aggressive Hybrid etc allocation. Hence putting all those numbers
in one place in a cumulative will push up the allocation in Mid and small cap
to and new high. I hope now it’s well clear why SEBI’s stress test and other
market rumours of correction will not play any role in getting reduced
allocation. It is now a game of compounding for the Midcap and Small to have
newer highs and more opportunity identification for investments.
Even the Mutual Fund Industry stress test result failed to find any
stress within Mid and small-cap categories. The beautiful thing is that all
these activities led to a surprise correction in quality stocks and created new
opportunities for the inflow of funds into this space.
The retail investors of India are more risk-taking and they have more
knowledge of portfolio and asset allocation models and they understand the
midcap and small return story as compared to what an investor used to
understand 20 years before. The strength of the retail investor is
proved when we find that retail investors have also pumped billions of rupees
into mid- and small-cap schemes. In the calendar year 2023, small-cap and
mid-cap schemes accounted for 40 per cent of the total net inflows into active
equity schemes, receiving ₹64,000 crore of total inflows of ₹1.6
trillion.
Retail investors have always been on the lookout for a stock that would
deliver multi-bagger returns within a year. The possibility of a large-cap
stock generating a multi-bagger return is quite low due to their already
established market positions with high market valuations.
If post-election we will find significant inflows coming in midcap and
small-cap space and direct equity options are being explored aggressively.
Between April last year and March this year, the average daily turnover in the
cash space has jumped over 98 per cent, which showcases the strong demand for
equity among investors. Further, the average daily turnover of BSE equity
derivatives contracts rises a whopping 2,400% to ₹34.6 trillion in FY24
from a mere ₹1.38 trillion in the preceding fiscal year. NSE’s turnover
jumped 111% to ₹324.9 trillion in FY24 from ₹153.5 trillion in FY23.
This reflects the maturity of the investors in the market.
Furthermore with Nifty lot size being reduced to 25 will lead to more
aggressive inflows from the retail clients. Indian benchmark Nifty
delivered robust returns, rising around 25 per cent in FY24 despite having
higher global interest rates and geopolitical tensions across the
globe. Now when the tide is going to turn on the other side
what numbers will come up on the table is very clear and so as the retail
investors who will join the market post-election results of June 2024. In fact,
we will find a surge in account openings once the exit poll numbers start
rolling out. One will find significant rallies in quality midcap and small-cap
post the correction and the major drive will be pre and post-election rallies,
which one might call a biased rally. Further, once the ROI starts coming down
the earnings will start picking up which will give a significant boost to the
midcap and small-cap space.
The midcap and small-cap companies are not leveraged as they have been historically. They are in a much better position compared to what it used to be 20 years before.
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