According to experts, fund managers raised their exposure to mid- and small-cap stocks in the past two months to take advantage of the market rally, thereby, boosting the fortunes of their funds. Mid and small-cap stocks remained subdued in the last 3-4 years and are expected to rally if the economy recovers in the coming months, said Pankaj Murarka, head, equity, Axis MF. Domestic institutional investors (DIIs) had turned more risk averse in the last 3-4 years amid a challenging economic environment but the sentiment is changing, said experts.
VP & senior fund manager of equity at Taurus MF Sadanand Shetty says the mid- and small-cap stocks are available at attractive valuations now and are better placed to post earnings growth in an economic upturn. There is a larger alpha to be made on these stocks, which are likely to be re-rated in the coming months, said Shetty.
In the year-to-date, Sensex has risen about 13% compared with gains of 14% and 19%, clocked by BSE mid-cap and BSE small-cap indices, respectively. The discrepancy in returns is even wider if the period since September is taken into consideration. BSE Midcap and BSE Smallcap indices gave returns of 44% and 50%, respectively, compared with 28% gains in the Sensex.
In FY14, the mid- & small-cap funds have given average one-year category returns of about 29% against 17.6%, 18.7% and 20.8% by large cap, large & mid cap and multi-cap funds, according to Value Research.
A recent India Equity Strategy report by Deutsche Bank hinted at an extended mid-cap rally going forward: Mid-cap stocks tend to post a sharp rally when economic growth is expected to be at an inflection point. While the jury is still out on the pace of economic recovery, we believe growth has bottomed out, currency has stabilised and the twin deficits have shown a marked improvement. These factors should be favourable for an economic recovery, which could be further bolstered by a decisive electoral outcome.
The strong performance of the mid-caps suggest that increasing number of investors are now confident of a stable government at the Centre, led by Narendra Modi.