Investors pile into small, mid-caps as earnings momentum improves

ET Intelligence Group: Investors are favouring small-cap and mid-cap stocks over their large-cap counterparts amid improving earnings momentum and higher market liquidity. This is visible from the trend in inflows in the current fiscal year. Investors have pumped nearly ₹25,200 crore into small-cap funds in the first four months of FY27, almost half of nearly ₹51,000 crore invested during the entire FY26.

This is also the highest amount invested in small-cap funds during the first four months of any financial year so far. Mid-cap funds garnered ₹23,218 crore, nearly 44% of the ₹52,800 crore invested in FY26. In contrast, large-cap funds attracted just ₹4,863 crore during the period, only about 20% of the ₹24,000 crore inflow in the previous financial year.

The pace of inflows has been stronger this fiscal year compared with FY26. In the first four months of the past year, small-cap funds attracted 42% of their full-year FY25 inflow compared with 36% for mid-cap funds and 33% for large-cap funds. In FY26, small-cap funds attracted ₹17,723 crore in the first four months, mid-cap funds received ₹15,059 crore while large-cap funds collected ₹7,741 crore.

"Since September, many small-cap companies have strengthened balance sheets, reduced leverage and improved debt-to-equity ratios, making them better positioned to withstand business cycles," Dinshaw Irani, CEO, Helios Capital Asset Management, told ET. He added that the large-cap universe includes several sectors facing earnings pressure, particularly IT and FMCG. This divergence in earnings prospects is making small-caps and mid-caps relatively more attractive to investors, despite their higher inherent risk.

Small-cap and mid-caps stocks tend to be more volatile and therefore riskier than large caps, implying that investors are showing greater appetite for risk. The rise in inflows into mid-cap and small-cap funds mirrors the strong performance of small- and mid-cap stocks over the past 12 months.

The BSE 250 SmallCap Index rose 6.8% while the BSE 150 MidCap Index gained 9.4%. The BSE Sensex, on the other hand, fell by 4.4% during the period whereas the BSE 100 Index remained flat. Experts attribute the increased appetite for small caps to a combination of improving earnings, relatively attractive valuations and strong domestic liquidity.

Small-cap funds also recorded the highest net inflows among the three categories in July. They attracted ₹7,767.5 crore, compared with ₹6,192.3 crore for mid-cap funds, while large-cap funds saw a net outflow of ₹1,321.7 crore.