Small- and Mid-Cap Funds Gain Favor Amid Higher Returns and Investor Confidence: ICRA Analytics

Higher returns, structural tailwinds and increasing investor confidence encourage investors to park their funds in small-cap and mid-cap funds over large-cap funds: ICRA Analytics

Mumbai, September 22, 2025: Higher returns, structural tailwinds and increasing investor confidence backed by recent government initiatives and regulatory reforms has made small and mid-caps more attractive to retail investors, ICRA Analytics said.

While large-cap funds provide stability, lower volatility and long-term capital preservation, their growth is often incremental and tied to macroeconomic cycles. However, small and mid-cap firms have greater room to expand, innovate, and capture market share, leading to higher earnings growth. This seems to be encouraging retail investors to invest in such schemes.

This reflects in the surge in inflows into these funds. Mid-cap and small-cap categories reported robust growth in net inflows on a year-on-year basis, rising 74.51% and 55.57% to Rs. 5331 crore and Rs. 4993 crores, respectively. The net inflow of mid-cap and small-cap fund categories went up 55.01% and 22.01%, respectively, since the beginning of this financial year. In contrast, large-cap funds witnessed a net inflow of Rs. 2,835 crores in August 2025, a growth of 7.51% as compared with Rs. 2,637 crores in the same period last year. The inflow rose 14.34% from Rs. 2,479 crores in March 2025.

Net AUM of mid-cap funds increased by 10.9% on yoy basis at Rs 4.27 lakh crore, while that of small-cap funds increased by 9.56% yoy at Rs 3.51 lakh crore in August 2025. Net AUM of large-cap funds increased by 5.86% yoy at Rs 3.90 lakh crore.

Commenting on the AMFI data for the month of August 2025, Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics, said, “Large-cap companies are already mature and well-established. Their growth is often incremental and tied to macroeconomic cycles. In contrast, small and mid-cap firms have greater room to expand, innovate, and capture market share, leading to higher earnings growth. Moreover, large caps often trade at higher valuations due to their perceived stability. This premium can limit upside potential. However, small and mid-caps are frequently undervalued, offering better price-to-earnings ratios and return on assets.”

“Recent government initiatives and regulatory reforms have boosted investor confidence in smaller companies. Enhanced governance, financial literacy, and digital access have made small and mid-caps more attractive to retail investors. Moreover, policies aimed at intrinsic economic growth, such as support for MSMEs, improved disclosures, and stress testing, have created a favorable environment for small and mid-cap companies to thrive,” Kumar added.

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