Mutual funds bought 505 smallcap stocks in March crash. Two weeks later, they're winning big

While retail investors were fleeing, India's mutual funds were buying. When the Nifty Smallcap 250 index cratered 10% in March, fund managers across the country's asset management industry quietly turned net buyers in 505 smallcap stocks in a bet that has paid off handsomely as the index has surged 13% in April so far.

Urban Company was the single largest acquisition in value terms, with mutual funds collectively purchasing Rs 862 crore worth of the stock in March, according to estimates by Prime Database. The next nine names on the buy list read like a conviction portfolio built for a recovery trade — Manappuram Finance (Rs 431 crore), Amber Enterprises India (Rs 399 crore), Jain Resource Recycling (Rs 294 crore), RBL Bank (Rs 292 crore), Aster DM Healthcare (Rs 230 crore), LIC Housing Finance (Rs 220 crore), Ather Energy (Rs 211 crore), Sona BLW Precision Forgings (Rs 203 crore), and Dr. Lal PathLabs (Rs 202 crore).

Beyond the top ten, the breadth of buying was striking. Fund managers also accumulated positions in Netweb Technologies, Hindustan Copper, Swan Defence, PTC Industries, Zen Technologies, Inox Wind, Tata Technologies, Tata Chemicals, S.J.S. Enterprises, DCB Bank, and Azad Engineering — a sweep across defence, industrials, financials, and healthcare that suggests a broad-based conviction call rather than isolated stock-picking.

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The Funds That Called It

Back in January-end, ICICI Prudential Mutual Fund indirectly signaled opportunities in the smallcap end of the market when it resumed subscription in its small cap fund. Later on, Tata Small Cap Fund also re-opened lumpsum investments.

"We had turned cautious on the small cap segment in June 2023 and had shut the lump sum window, as earnings expectations were running ahead of fundamentals and valuations had become elevated," said Chandraprakash Padiyar, Senior Fund Manager at Tata Asset Management. "However, over the past two years, market volatility and global geopolitical factors have led to a meaningful moderation in earnings expectations and a correction in valuations. At current levels, we believe valuations are far more reasonable and the risk-reward has turned favourable."

Padiyar added that the fund had undergone a substantial internal rebuild over the past 15-18 months, with nearly 75-80% of the portfolio rejigged and the top 30 companies now accounting for over 70% of holdings — a concentration around high-conviction ideas with strong earnings visibility.

The Broader Case for Smallcaps Now

The conviction isn't limited to Tata. Vinay Paharia, CIO at PGIM India Mutual Fund, argued that the March selloff, driven by what he called a confluence of oil shock, capital outflows, currency pressure, AI-related growth concerns, and growth downgrades, had done the market a favour by stripping out excess valuation.

"Many of these being transitory and would resolve themselves with passage of time," Paharia said, noting that large caps and small caps are now trading very close to their longer-term valuation averages. He flagged midcaps as the one segment still carrying moderately rich valuations and therefore less preferred. "It is a good time to increase allocation to Indian equities."

Paharia was particularly constructive on quality growth businesses, where he argued both valuation and earnings growth are aligned for long-term investors, a combination that rarely presents itself outside of sharp market corrections.

Axis Mutual Fund's assessment was more measured but directionally consistent. In its market note, the fund house acknowledged that valuations had "adjusted meaningfully," with derating across large, mid, and smallcap stocks reducing excesses built over the past year. However, it cautioned that the picture was not uniformly attractive — select cyclical, industrial, and financial names offered compelling entry points, while large parts of consumption and investment-led sectors continued to trade at elevated multiples.

"The current environment is therefore better characterised by valuation dispersion rather than uniformly attractive valuations," Axis said, reminding investors that the March buying opportunity rewarded selectivity, not a blanket smallcap bet.