Be selective to beat volatility shockers in small cap mutual fund schemes, says Nitin Rao of Epsilon Money Mart

The Smallcap index is still languishing at the same levels as that of 2018-19, so while a lot of companies have indeed improved their businesses, they haven’t had any re-rating. However, investors must know their risk appetite before plunging into mutual fund schemes with exposure to small cap stocks as they can be very volatile over the short term, Nitin Rao, Head of Products and Proposition at Epsilon Money Mart says.

A significant climbdown was seen in April equity MF net flows over March despite equity markets shedding their underperformance over the January-March quarter. What could be the reason?
There could be a variety of reasons. And that’s why we believe that seeing flows every month should be taken with a pinch of salt. The first reason could obviously be profit-booking at higher levels as we had a very smart rally of around 1000 points in Nifty. Also, with a not so good global scenario, the investors are continuously in two minds.


With the Fed looking to finally slowdown the interest rate hikes, a shift will be there in fixed income generating asset classes too. It is worth noting that SIP inflows are still healthy. It makes sense for the investors to continue with their investments and not deter from it.

Mid cap and small cap schemes saw reasonably better investor interest in April. Do you think the valuations have become attractive in this segment?
We have belonged to the mid-small cap camp for the last couple of months now and investors have been able to get good returns - average returns being 5-6%. What we saw in October 2021 wherein a lot of valuation froth was there in these high beta stocks. However, since then a lot of value has emerged.

The small cap index is still languishing at the same levels as it was during 2018-19, so while a lot of companies have indeed improved their businesses, they haven’t had any re-rating. However, investors must know their risk appetite before plunging into mutual fund schemes with exposure to small cap stocks as they can be very volatile over the short term.

Do you see the current performance from mid and small cap schemes to sustain, going forward?
We are past Karnataka election results now with 3 major state elections due this year before the Lok Sabha elections in 2024. We also expect the RBI rate trajectory to have plateaued. Therefore, markets do have a lot to digest. We have had a smart recovery in the last 45 days, hence some consolidation will be good.

With liquidity on the lower side, for valuations to sustain, fundamentals must support the company’s prices now. Hence going forward investors can be selective in their tactical bets. However, for long term investors, they can continue to hold and reap the benefits of compounding.

Banking crisis remains far from over in the US. Do you see a rub-off impact on Indian equities, and will that eventually dent prospects of equity MFs?
We are a global economy indeed and we can’t live in isolation. However, we do believe that the situation though sticky will not affect the Indian markets or the Indian banks much. We have had the strongest balance sheets and now with private investments coming back, our lending institutions should see good growth going forward. To achieve the $5 trillion dream, we need bigger banks, and we need credit for that. With IT and Pharma now slowly forming a bottom, markets should do well going forward.

If one wants to invest in debt schemes, which categories would you recommend for investment?
Investment in any product should be based on an investor’s needs and requirements. Debt provides regular income as well as capital protection. Therefore, investors should evaluate a debt fund based on their investment horizon, their risk tolerance and investment objectives.

With rate hikes more or less done, duration can be added to one’s portfolio. Investors looking for parking short-term funds can invest in short duration funds.

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