Small, mid and largecap mutual funds see sharp inflow surge in March. Is investor confidence rising?

Synopsis

Equity mutual funds saw a significant surge in monthly inflows during March, despite market downturns. This rise reflects a shift in investor behavior, with corrections now viewed as buying opportunities. Robust SIP flows and sustained confidence in India's growth outlook are key drivers behind this trend.

Despite benchmark indices, Sensex and Nifty50, ending March deep in the red with losses of over 11%, equity mutual funds across market caps saw a sharp rise in monthly inflows during the same period.

Experts say the surge reflects a clear shift in investor behaviour, with market corrections increasingly viewed as buying opportunities rather than exit points. Robust SIP flows, a rotation away from defensive assets, and sustained confidence in India’s growth outlook have further supported the uptick in inflows.

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Rajesh Minocha, a Certified Financial Planner (CFP), Founder of Financial Radiance, shared with ETMutualFunds that the market surge is driven by rising investor sentiment and short-term momentum. Strong performance is fuelled by systematic investment in mid-cap and small-cap funds, which sustain demand, and investors are following historical return patterns, which generate momentum rather than reflecting fundamental value.

With financial literacy rising substantially over the years, many investors have started taking advantage of the bearish phase to build long-term wealth, unlike in the past, when a substantial pullout by Foreign Institutional Investors used to trigger market crashes amid negative sentiment, Minocha further said.

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Shivam Pathak, CFP and Founder of Asset Elixir, shared with ETMutualFunds that the sharp rise in inflows reflects improving investor confidence, not just short-term momentum, the recent corrections made valuations more attractive, and many investors viewed this as a buying opportunity and strong SIP flows, a shift from defensive assets, and confidence in India’s growth outlook also supported the surge.

In March, according to the latest data released by the Association of Mutual Funds in India (AMFI) on April 10, inflows into large, mid and smallcap funds rose by 42%, 51% and 61%, respectively, on a month-on-month basis in March, reflecting strong participation across segments.

Out of the total equity mutual fund inflows of Rs 40,450 crore in March, largecap funds received Rs 2,997 crore, smallcaps received Rs 6,263 crore and midcap funds received Rs 6,063 crore.

Portfolio allocation: How should investors balance exposure?

With inflows rising sharply across categories, investors are now evaluating how to balance their portfolios between large, mid and small caps.? Pathak said that allocation should depend on risk profile and goals.

He further said that large caps can offer stability, while mid and small caps add growth potential so if these categories now exceed your target allocation, partial profit booking or rebalancing can be considered.

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To this, Minocha said core allocations should focus on large-cap assets, with limited exposure to mid and small-cap assets for growth; discipline should guide investment decisions over excitement and most investors can continue investing in a flexi-cap fund and leave this judgement to the experts.

SIP vs lumpsum: What should investors do now?

With markets remaining volatile, experts are recommending to stagger the investments or invest through SIPs in equity mutual funds.

According to a monthly note by AMFI, The onset of the US-Iran conflict on February 28, followed by sustained retaliatory responses from Iran, plunged the global markets into turmoil, leading both Indian benchmark indices to their fourth straight monthly falls during the month.

The BSE Sensex slipped below the 74,000-point mark for the first time since April 2025 before settling at 71,948 points at March-end, marking an 11.5% decline compared with the end of the preceding month. The Nifty 50 also slipped below the 23,000-point mark to close at 22,331 points, reflecting an 11.3% on-month decline, the note further mentioned.

Given the current market environment, Minocha said that SIPs offer a safer approach at current valuations, given the volatility of mid-cap and small-cap stocks and investors may consider systematic transfer plans where there is lumpsum money to invest, as markets continue to be volatile and there could be further downward potential that can help investors in averaging out their purchases.

First-time investors should limit exposure to small caps, as strong inflows do not reduce risk, Minocha further said.

Sharing a similar opinion that investors should choose SIPs at the current point of time and first time investors should keep small cap exposure limited, Pathak said that SIP is the better route at current levels as it helps manage volatility through staggered investing and first-time investors should start with large cap, flexi-cap, or diversified funds, and keep small cap exposure limited.

With the start of the new financial year and investors wondering where to invest, market experts said that one should consider investing in a mix of large cap and flexi cap, consider gold for hedging against global uncertainties and silver can be avoided at this point.

Also Read | Mutual fund SIP stoppage ratio jumps to over 100% in March, even as contributions hit record Rs 32,000 crore

They said that SIP allocations should focus on a balanced mix led by large cap and flexi cap funds, which offer better stability and earnings visibility in the current phase of valuation consolidation. Midcaps can be added selectively for growth, while small caps should be limited and approached only through SIPs due to higher volatility.

So with investors recommending these categories for SIPs and investment and investors pouring in huge money in these categories, what is the way ahead for these funds?

Pathak said that large caps may offer better stability in a volatile market, mid caps can remain volatile but may do well over the long term and small caps carry higher risk, and returns will depend on earnings growth so overall, near-term volatility may continue, but the long-term outlook remains positive.

Minocha said that while large-cap stocks provide investors with both secure options and valuable investments, the market for mid and small-cap stocks will experience multiple periods of far greater volatility.

He further said that mid and small-cap markets are likely to face periods of instability following recent price increases. While the long-term strategy remains unchanged, short-term results may be unpredictable, so expectations should be based on actual market performance so investors should continue to purchase based on their goals, risk appetite and time horizon.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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