Retail investors showed renewed interest in mid- and small-cap mutual funds in June, with both categories individually attracting higher inflows than flexi-cap funds for the first time since December 2023.
According to Association of Mutual Funds in India (AMFI) data, mid-cap funds received net inflows of ₹6,090 crore during the month, followed by small-cap funds at ₹5,602 crore. Flexi-cap funds attracted ₹5,231 crore.
While flexi-cap funds continued to receive healthy inflows, experts say improving sentiment towards the broader market, better earnings visibility and stronger recent performance prompted investors to increase allocations to mid- and small-cap funds.
Why investors are betting on mid- and small-cap funds again
Madhu Lunawat, Founder, MD and CEO, The Wealth Company Mutual Fund, said the June numbers suggest investors are becoming more constructive on the broader market after a period of correction and consolidation.
“After a period of correction and consolidation, many quality mid- and small-cap companies are beginning to see improving earnings visibility, making these segments attractive for investors with a longer investment horizon,” she said.
Jiral Mehta, Senior Research Analyst at FundsIndia, attributed the shift to stronger recent performance, attractive valuations following last year’s correction and expectations of lower interest rates.
“Mid- and small-cap stocks have been rising faster than large-cap stocks lately, and investors naturally lean towards what has been doing well recently. Many of these stocks had also fallen quite a bit over the past year, so this felt like a good re-entry point for investors who had been waiting on the sidelines. Falling interest rates help smaller companies too, since they typically borrow more to grow, so investors may be expecting better days ahead for them,” she said.
Both experts, however, cautioned against reading too much into a single month’s data.
Lunawat said the moderation in flexi-cap inflows likely indicates that investors are complementing their existing allocations with dedicated exposure to mid- and small-cap funds rather than moving away from flexi-cap funds altogether.
Mehta echoed a similar view, noting that flexi-cap funds themselves did not witness weaker inflows.
“Flexi-cap funds didn’t decline, they got more money in June than in May. Mid- and small-cap funds simply grew a bit faster, enough to overtake flexi-cap for the first time in over a year. This makes sense because flexi-cap funds already invest across all types of companies, so some investors feel they are getting that mix already.” she said.
Mid- and small-cap funds have outperformed flexi-cap peers
The recent performance of these categories also helps explain the shift in investor preference.
According to Value Research data, mid-cap funds have returned 6.6% over the past one year, followed by 5.69% for small-cap funds. In comparison, flexi-cap funds have delivered 1.04% during the same period.
The outperformance extends over longer time frames as well. Mid-cap funds have generated annualised returns of 19.66% over three years and 16.57% over five years, while small-cap funds have returned 18.52% and 16.51%, respectively. Flexi-cap funds, meanwhile, have delivered 13.22% over three years and 11.87% over five years.
Lunawat said investors should avoid chasing categories based on a single month’s inflow data, adding that long-term wealth creation depends more on staying invested with the right asset allocation than on chasing the category attracting the highest inflows in any particular month. Mehta similarly advised investors to base investment decisions on their financial goals and risk appetite rather than a single month’s category rankings.