Large-caps remain in focus at FIIs

Despite Mid-cap funds outperforming large-caps, we have seen FIIs not deploying incremental liquidity into that space. However, since the performance remains strong, we are also not seen any outflow pressure, said Elara Securities in its latest report

New Delhi: The big deployment by foreign funds into India’s Mid-cap funds peaked in the week ending September 13. They haven’t done any incremental deployment for the past two months, as per a report by Elara Securities. All incremental India dedicated flows continue to move into Large-cap funds. Mid- and Small-cap flows remain flat.

However, the domestic small-cap inflows are helping them generate strong performance in mid/small-cap space. Hence, the relative NAV line of India dedicated Mid-cap to Large-cap funds has broken-out in August 2022. Despite Mid-cap funds outperforming large-caps, we have seen FIIs not deploying incremental liquidity into that space. However, since the performance remains strong, we are also not seen any outflow pressure, the report said.

The proportion of Nifty’s market capitalization (mcap) to total India’s market cap has been drifting down since October 2020 and drops to historic lows. Such lower readings were previously seen in January 2004, September 2007, November 2010 and January 2018 period. Every single time, the expansion in this ratio from lows was accompanied by a market correction, the report said.

In the phase of reversal from lows, the correction in Nifty was smaller than overall markets. In the current cycle, we had seen this ratio hitting lower end in September 2022 (where we saw one strong round of small-cap correction), however, the strong revival in domestic small flows has again dragged the ratio down since Aprril 2023. As soon as the ratio reached August 2023 lows, we saw FII inflows into India Mid-cap funds stopping. Since then, all incremental FII liquidity is moving to Large-caps.