Structural tailwinds, higher returns drive investor shift to small & midcap mutual funds over largecaps: ICRA

Higher returns, structural tailwinds, and increasing investor confidence backed by recent government initiatives and regulatory reforms have made small and mid-caps more attractive to retail investors.

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, ICRA Analytics said in a press release.

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This reflects in the surge in inflows into these funds as 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 crore, 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 crore in August 2025, a growth of 7.51% as compared with Rs 2,637 crore in the same period last year. The inflow rose 14.34% from Rs 2,479 crore in March 2025.

Net AUM of mid-cap funds increased by 10.9% on a 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.

“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,” said Commenting on the AMFI data for the month of August 2025, Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics.

Net AUM (Rs lakh crore)	August 2025	August 2024	Growth (%)
Large Cap	3.90	3.68	5.98
Mid Cap	4.27	3.85	10.91
Small Cap	3.51	3.20	9.69

Source: AMFI, MFI360 Explorer

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“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.

Average returns generated by these categories

Scheme Name	1-Year (%)	3-Years (%)	5-Years(%)
Large Cap Fund	-3.77	13.47	17.75
Mid Cap Fund	-3.95	19.64	25.33
Small Cap Fund	-6.41	19.32	28.27

Source: MFI360Explorer