Are Small-Cap and Mid-Cap Funds Driving Investor Inflows Due to Structural Tailwinds and Regulatory Reforms?
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Synopsis
Retail investors are increasingly drawn to India's small- and mid-cap mutual funds, spurred by the potential for higher returns and beneficial regulatory changes. Discover how these structural factors are shaping the investment landscape and what it means for investors looking to maximize their returns.
Key Takeaways
- Small-cap and mid-cap mutual funds are gaining traction among retail investors.
- Net inflows for mid-cap funds reached Rs 5,331 crore in August.
- Small-cap funds saw inflows of Rs 4,993 crore.
- Net AUM of mid-cap and small-cap funds increased significantly.
- Government initiatives are fostering a supportive environment for these funds.
New Delhi, Sep 22 (NationPress) Retail investors are increasingly turning their attention to small-cap and mid-cap mutual funds in India, driven by the potential for higher returns, favorable structural trends, and recent regulatory reforms, according to a report released on Monday.
In August, mid-cap schemes experienced net inflows of Rs 5,331 crore, reflecting a remarkable 74.5 per cent growth year-on-year, while small-cap funds attracted Rs 4,993 crore, a significant 55.6 per cent increase year-on-year. In comparison, large-cap funds only garnered a net inflow of Rs 2,835 crore, showing a modest 7.5 per cent rise, as per the findings from ICRA Analytics.
Since the start of the financial year, net inflows for mid-cap and small-cap fund categories surged by 55.01 per cent and 22.01 per cent, respectively.
The net assets under management (AUM) for mid-cap funds rose by 10.9 per cent year-on-year to Rs 4.27 lakh crore, while small-cap funds saw a 9.56 per cent year-on-year increase to Rs 3.51 lakh crore in August 2025. In contrast, large-cap funds recorded a 5.86 per cent year-on-year growth, totaling Rs 3.90 lakh crore.
“Large-cap companies are generally established and mature, resulting in incremental growth linked to macroeconomic cycles. Conversely, small and mid-cap enterprises possess greater opportunities for expansion, innovation, and market share acquisition, which leads to enhanced earnings growth,” stated Ashwini Kumar, Senior Vice President and Head of Market Data at ICRA Analytics.
Moreover, large-cap stocks often command higher valuations due to their perceived stability, which may restrict their growth potential. In contrast, small-cap and mid-cap stocks are frequently undervalued, providing more attractive price-to-earnings ratios and return on assets, Kumar added.
Kumar emphasized that recent government measures supporting MSMEs, along with improved corporate transparency and stress testing, have cultivated a nurturing environment for the growth of small and mid-cap firms.
As of August 31, 2025, the one-year returns for large-cap funds stood at -3.8 per cent, mid-cap funds at -3.9 per cent, and small-cap funds at -6.4 per cent.
Over three years, returns for large-cap, mid-cap, and small-cap funds were 13.5 per cent, 19.6 per cent, and 19.3 per cent, respectively.
Point of View
I believe the growing interest in small and mid-cap mutual funds reflects a broader trend of investors seeking higher returns in a dynamic market. The structural tailwinds and regulatory reforms are essential factors driving this shift, and it's crucial for investors to stay informed about these evolving opportunities.
NationPress
22/09/2025
Frequently Asked Questions
What are small-cap and mid-cap mutual funds?
Small-cap and mid-cap mutual funds invest primarily in companies with smaller market capitalizations, typically offering higher growth potential but also come with increased risk.
Why are investors focusing on small and mid-cap funds?
Investors are attracted to small and mid-cap funds due to their potential for higher returns, fueled by structural tailwinds and favorable regulatory changes.
How have recent regulatory reforms impacted these funds?
Recent regulatory reforms have created a more favorable environment for small and mid-cap companies, enhancing their growth prospects and investor confidence.
What were the net inflows for small-cap and mid-cap funds in August?
In August, mid-cap funds recorded net inflows of Rs 5,331 crore, while small-cap funds attracted Rs 4,993 crore.
How do returns compare between large-cap, mid-cap, and small-cap funds?
Over three years, large-cap funds returned 13.5%, mid-cap returned 19.6%, and small-cap returned 19.3%.
