Investors are flocking to mid- and small-cap mutual fund schemes. In the first four months of this financial year, these two categories accounted for more than 50% of the total folios added by the mutual fund industry — the highest since the Association of Mutual Funds in India (Amfi) began making the data public.
The rise of the mid- and small-cap funds is staggering, given that their share in folio additions was just 2.91% in FY21. In fact, small-cap schemes had seen a net decline in folio additions then.
The two categories have also attracted healthy net inflows in recent months, accounting for about 56% of total equity fund inflows in July 2026. This was the first time since 2023 that cumulative monthly inflows into mid- and small-cap funds accounted for more than half of total equity inflows.
Experts attributed the surge in investor interest largely to the strong performance of mid- and small-cap stocks. The BSE MidCap and SmallCap indices have risen about 20% and 30%, respectively, in the first four months of FY27. In comparison, the large-cap benchmark indices, the Sensex and the Nifty, have gained about 8.5-9% during the period.
DP Singh, joint CEO, SBI Mutual Fund, said mutual fund folio additions are largely driven by fintech platforms, where investment decisions tend to be influenced by recent performance. The rally in mid- and small-cap stocks since March has, therefore, been a key reason for the elevated investor interest, he said.
Singh added that the recent underperformance of large caps relative to mid- and small-caps has also weighed on the performance, and subsequently investor interest in multi-cap and flexi-cap categories because of their relatively high exposure to large-cap stocks. As a result, investors have poured more money into dedicated mid- and small-cap funds to participate in the rally.
However, he said the continued flow of systematic investment plan (SIP) money into large-cap funds despite their recent underperformance was an encouraging sign.
Trideep Bhattacharya, president and CIO-equities, Edelweiss Mutual Fund, attributed the strength of flows into mid- and small-cap funds to robust earnings momentum and upgrades in these segments, particularly among companies that are leaders in niche businesses or challengers to established incumbents in certain sectors.
Vaibhav Porwal, co-founder, Dezerv, said that besides the rally in mid- and small-cap stocks, investors are also using these funds to gain exposure to the growth of sectors such as chemicals, real estate, textiles, media, and manufacturing, which have limited or no representation in large-cap indices.
Porwal added that an analysis of folios on his platform showed that investors outside tier-1 cities have meaningfully higher allocations to mid- and small-cap categories, indicating a greater willingness to take exposure to higher-risk segments in pursuit of higher returns.
As equity markets continue to navigate volatility, Singh expects mutual fund flows to remain influenced by recent market performance, given the momentum-chasing behaviour seen among investors so far in FY27.
Porwal said investors may continue allocating money to mid- and small-cap funds, but the pace of inflows and returns will depend on the quality of underlying businesses, earnings growth and valuations.