Why investors are pouring money into midcap and smallcap mutual funds again

Investor interest in midcap and smallcap mutual funds made a strong comeback in June after moderating in the previous month. According to the latest data released by the Association of Mutual Funds in India (AMFI), equity mutual fund inflows jumped nearly 26% month-on-month, driven largely by midcap and smallcap funds emerging as the biggest contributors to the recovery.

Midcap funds attracted the highest inflows among all equity mutual fund categories at Rs 6,090 crore in June, while smallcap funds also witnessed healthy investor participation with second highest inflows in the same period. On a month on month basis, the inflows in mid cap funds and small cap funds went up by 39% and 13% respectively.

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Experts said that the better performance of broader market stocks appears to have encouraged investors to increase allocations to midcap and smallcap mutual funds.

Feroze Azeez, Joint CEO, Anand Rathi Wealth Limited said that one of the most encouraging trends in the June AMFI data is that investors continue to back the mid and small cap segments despite recent market volatility which suggests that investors are looking beyond short term market movements and are investing where they see long term growth potential.

In FY26, these were also the second and third largest categories by net inflows, attracting over Rs 1.03 lakh crore in total and accounting for nearly 15% of total equity fund inflows individually, he further said.

Both categories witnessed a meaningful rebound compared with May and remained among the strongest contributors across the equity universe, said Nehal Meshram, Senior Analyst, Morningstar Investment Research India.

She further said that their performance over the first half of the year has been particularly noteworthy, attracting cumulative inflows of approximately Rs 30,279 crore and Rs 30,527 crore, respectively,

How indices moved in June

The renewed interest coincided with the performance of the broader market during the month. While the benchmark Nifty 50 - TRI gained around 2.38% in June, the Nifty Smallcap 250 - TRI index rose about 5.17%, outperforming the benchmark. The Nifty Midcap 150 - TRI index also ended the month in positive territory with a gain of around 2.36%.

In the calendar year 2026 so far, where Nifty50 - TRI fell 6.72%, Nifty Midcap 150 - TRI and Nifty Smallcap 250 - TRI were up 4.33% and 8.83% respectively.

The rebound in inflows comes after equity mutual fund investments had slipped to a one-year low in May. Despite market fluctuations, retail investors continued to invest in equity mutual funds, making June the 64th consecutive month of net inflows.

Feroze Azeez said that the optimism is backed by fundamentals as well and earnings for the Nifty Midcap 150 and Nifty Smallcap 250 are expected to grow by 18% and 20% in FY27, followed by 16% and 18% in FY28, while both indices continue to trade below their estimated fair value by around 10% to 16%.

Continued interest in mid-cap, small-cap, flexi-cap and diversified equity strategies suggests that investors remain optimistic about India's structural growth story while seeking opportunities across different segments of the market, said Rohit Sarin Co-Founder, Client Associates.

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Midcap and smallcap funds performance

In June, midcap funds delivered an average return of 3.72% with Invesco India Midcap Fund emerging as the top performer with 7.83% return, followed by Helios Mid Cap Fund which gave 6.71% return. ICICI Prudential Mutual Fund gave the lowest return of 1.44% in June.

In the same time period, smallcaps delivered an average return of 6.19% and Helios Small Cap Fund delivered the highest return of around 9.03%, followed by Invesco India Smallcap Fund which gave 8.95%. Samco Small Cap Fund gave the lowest return of 3.71% in June.

The net assets under management (AU) for mid cap funds went up by 4% on monthly basis to Rs 5.06 lakh crore in June from Rs 4.87 lakh crore in May. The AUM of small caps surged 6% to Rs 4.29 lakh crore in June against Rs 4.04 lakh crore in the previous month.

Feroze Azeez said that the confidence is also reflected in the size of these categories, with mid cap and small cap fund AUM reaching Rs 5.06 lakh crore and Rs 4.30 lakh crore respectively, growing over 17% and 21% in the last one year.

With these two categories receiving a notable boost in the inflows, Umesh Sharma, CIO- Debt, The Wealth Company Mutual Fund believes it to be a signal for increased risk appetite from investors.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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