Mutual fund investors pivot to safety of large-cap stocks amid market slide

Investors in mutual funds pivoted towards the safety of large-cap stocks and gold exchange-traded funds in January as markets turned volatile, data released on Wednesday showed. 

Inflows into mutual fund schemes investing in large-cap stocks jumped 52.3% to Rs 30.63 billion in January, the second-highest monthly inflow on record, according to data by the Association of Mutual Funds in India.  

Gold ETFs witnessed the highest monthly inflows ever in January at Rs 37.51 billion, the data showed.   

Overall inflows into equity mutual funds declined 3.6% month-on-month to Rs 396.88 billion ($4.57 billion) from Rs 411.56 billion in December 2024.   

Investments in local mutual funds have held steady so far, totalling $18.42 billion since October 2024 and helping stabilise markets as foreign investors withdrew Rs 1.8 trillion ($20.72 billion).   

But volatility in the markets is now prompting investors to shift strategies, analysts said.   

“With capital preservation being the key priority amid the ongoing decline in markets, domestic mutual fund investors will continue to shift to large caps where valuations are relatively cheaper compared to the broader markets,” said Nitin Bhasin, head of institutional equities at Ambit Capital.   

Investors also moved away from sectoral and thematic funds, where inflows fell 41.2% month-on-month to Rs 90.17 billion partly as the number of new sectoral fund launches fell.   

Flows into small-cap and mid-cap funds rose 22.6% and 1.1%, respectively.   

Last month, India’s benchmark NSE Nifty 50 and BSE Sensex fell about 0.6% and 0.8%, respectively, while the broader small-caps lost 10% and the mid-caps shed 6%.   

So far this month, Nifty and Sensex are down 2% each, while small-caps and mid-caps have both lost about 6%.   

The decline in equity markets is being driven by slowing corporate earnings and domestic economic growth and by foreign portfolio investors (FPI) offloading equities worth about $9 billion in January – the second-highest monthly outflows on record, analysts said.   

Contributions to systematic investment plans (SIPs), where investors make regular payments into mutual funds, fell marginally to Rs 264 billion, after hitting a record high in December.   

The SIP contributions, which hit record highs in 17 of the last 19 months, will remain stable, cushioned by shift to large-caps from small- and mid-caps in the next few months, said B. Gop Kumar, managing director and chief executive at Axis Mutual Fund.