What have been the reasons for the performance of mid- and small-cap stocks? Is it fundamental or flows driven?
If you look at the small-cap space in India, it reflects the mood of Indian investors towards equity.
So, if you were to see periods of time when they are not very positively inclined towards equity then the small-cap index has given negative returns – the period of 2011-12 is one such instance. When they are very positive on equities, this space delivers very high returns.
So you have to first balance it in the context that a lot of Indian investors feel that the might of the foreigners and in case of domestic mutual funds, these guys don't want to play in the large-cap or even mid-cap space and hence this space is available for them to operate.
Post 2009, after the debacle of 2008, a lot of funds took a policy to stay out of companies beyond a certain kind of market cap. Few investors who had more foresight were able to pick up stocks which were doing well. And then we had a bump-up in the economy as such. A lot of those companies were also related to the housing sector. So you'll find a whole lot of sectors related to housing where the small-cap exposure has done very well.
So, it wouldn't be very surprising to find that people who invested in 2009-10 in the small-cap space are up 10 or 15 or 20 times from those levels. What one should worry about is from here on what will happen because the success of the space has made it much more attractive for others.
And given our industry's great ability not to miss on any opportunity, I am sure we have already started the process of launching small-cap funds and will do several more.
So if you were to see the mood of Indian investors, then I believe it is best reflected in the small-cap index. And if it is flat or negative then you won't get flows into equities. And when you see that index doing well, you will see flows into equities being fairly strong.