‘HNIs View Corrections as Opportunities to Rebalance or Fill Allocation Gaps’

What do you make of the recent concerns in some quarters over retail investors taking to small-cap funds in a significant way, with worries expressed over the risk-reward payoff? What would your advice to investors be?

Retail investors have been moving towards small-cap funds for higher growth potential in their portfolio.

Small-cap funds have a total AUM (as on Feb 2025) of ₹2.7 lakh crore, which is less than 10 per cent of the total equity mutual fund AUM (about ₹27.4 lakh crore). Over the last few years, average monthly inflows into small-cap funds have typically been around ₹3,000 crore (about 10 per cent of total inflows into equity mutual funds). While they seem to be perceived to be risky, active funds in the space have a beta less than 1, and thus are less sensitive to market movements than expected. Over long time horizons of over five years, it has been observed that small-caps have even outperformed large- and mid-caps.

It is the nature of small-cap to deliver higher returns but take much longer to revert after market corrections. The average time for recovery over the past three years after market corrections have been more than one year.

Hence, for an investor, having a 20-25 per cent small-cap exposure in the equity part of one’s portfolio would be the ideal allocation.

You deal mostly with HNIs and UHNIs as your clients. How different is their behaviour towards investments in general and especially during periods of drawdowns (such as during March 2020, June 2022, September 2024-March 2025 etc), compared with regular retail investors?

Clients with a clear investment strategy and goals are better equipped to handle both their return expectations and risk, staying calm even during volatile phases. This has been observed most with HNIs and UHNI clients as they also have professional financial advisors to manage their portfolios.

Double-digit percentage corrections in equity markets are quite common. Such drawdowns usually last seven-eight months, after which markets tend to recover. Investors with long-term goals are less impacted by short-term volatility as they stay invested and do not panic. Instead, they view corrections as opportunities to rebalance or fill allocation gaps.

While SIP flows have continued to remain steady, there is the issue of SIP stoppages in recent months. Do you think this is temporary or is there a cause for concern?

SIP cancellations happen for various reasons, including fund redemption due to reaching goal, switches and STPs. Thus, focusing solely on the stoppage ratio can be misleading. The net SIP inflows, which stood at ₹25,999 crore in February 2025, marked a 35 per cent growth from ₹19,187 crore last year. This net inflow number is the main indicator when we are looking at SIPs, and despite a higher stoppage ratio, overall investor participation in SIPs remained strong.

Another important point to note is that most of these cancellations have started coming on direct mutual funds which depicts that investors who are invests on their own without laying down an investment strategy tends to get more jittery in such market scenarios. Going forward, we only expect SIP participation to get stronger as SEBI is taking active Initiatives to engage more investors in the equity market via this mode.

Given that much of the interest in the market post-Covid has centred on equities, has fixed-income become a less-attractive option? More so, after the removal of indexation benefits and full taxation? Does this risk skewing investor portfolios too much in favour of equities without balancing with debt options?

After the removal of debt indexation and the taxation changes, debt has become a comparatively less-attractive option for investors. However, Indian households are still invested heavily in debt, with almost 60 per cent of their financial assets invested in debt or debt-like instruments. Hence, to urge Indian investors to look for inflation-beating investment avenues, equity was given a favourable stance.

Investors should go for a mix of equity and debt in the right proportions, as they have low correlation with each other and provide portfolio diversification benefits. The ideal allocation for the long term would be 80:20 in equity and debt, 70:30 for medium term and 100 per cent debt in case of short term. Investors should avoid overconcentration in any certain asset class and their portfolios should be rebalanced regularly.

What is your take in the talk around mutual funds (SIPs) weaning away flows from bank deposits? Bank deposits have grown 11 per cent annually for the past five years, while mutual fund AUM has risen at 19 per cent (February 2025 data).

Though the proportion of equity and equity mutual funds have increased significantly between 2014 and 2024, from a combined share in overall financial assets of 5.3 per cent in March 2014 to 16.4 per cent in September 2024, Indian households still remain investing mostly in debt and debt-like instruments.

They have heavily allocated (with almost 60 per cent of their financial assets) in low but guaranteed returns assets, such as deposits, small savings, and pension and provident funds. However, we have noticed a shift in households investing behaviour with allocation towards low income-generating assets reducing.

In 2011-12, bank deposits dominated household financial savings, contributing 57 per cent of the savings. For 2022-23, deposits constituted 37 per cent of the households’ financial savings. Investments in mutual funds increased to 6 per cent of gross savings in 2022-23 from less than 1 per cent a decade ago. The annual flows towards mutual funds and equities which were ₹16,500 crore in FY12 have witnessed 12-fold rise to ₹2.1 lakh crore in FY23.

What is the mix of HNIs in your overall AUM? Why do you say ₹5-50 crore HNIs are most sustainable and scalable?

Our clients’ breakdown: ₹50 lakh – ₹5 crore: 21.8 per cent of total AUM; ₹5-50 crore: 53.7 per cent of total AUM; and ₹50 crore and above (UHNI Segment): 24.5 per cent of total AUM.

The number of income-tax filers earning over ₹50 lakh annually is rising steadily with every passing year, indicating a growing pool of high-income individuals with investment potential. As they accumulate wealth, many will actively seek professional financial advice. This makes the ₹5-50 crore HNI segment not only highly scalable but also a key target for long-term growth.

📰 Crime Today News is proudly sponsored by DRYFRUIT & CO – A Brand by eFabby Global LLC

Design & Developed by Yes Mom Hosting