Despite market volatility, mid, smallcap funds attract ₹53K cr in H2FY25

Midcap and smallcap funds have demonstrated remarkable resilience, continuing to attract robust inflows despite recent market volatility. These funds garnered more than ₹53,000 crore in the second half of 2024-25 (H2FY25), even as the broader market faced a steep correction. This sustained interest, experts said, had provided crucial support to the mid and smallcap segments — a trend unlikely to reverse unless long-term returns disappoint.

 

“Despite the correction we saw till the end of February, SIP (systematic investment plan) inflows into smallcap and midcap funds did not moderate meaningfully in February and March. This is contrary to expectations. The continued MF (mutual fund) inflows and slowdown in foreign institutional investor outflows probably contributed to the relief rally we saw last month,” said Krishnan V R, chief of the quantitative research team at Marcellus.

 

The interest towards small and midcap funds, which came on the back of strong performance over the past 2-3 years, will likely continue unless there is a prolonged correction, according to Himanshu Srivastava, associate director, manager research, Morningstar Investment Research India.

 

“A more sharp, consistent and prolonged correction in the markets as well as in the mid and small cap segments can reverse the trend,” he said.

 

Investors poured in over ₹83,000 crore into mid and smallcap funds in FY25. The quantum of inflows was higher in the second half of the year at ₹53,000 crore even as the market witnessed a steep correction. In comparison, mid and smallcap funds had raked in ₹62,415 crore in the whole of FY24.

 

The Nifty Smallcap 100 and Nifty Midcap 100 indices corrected 16 per cent and 14 per cent, respectively, in the last six months of FY25.

 

The two scheme categories also maintained their lead in new account additions with 38 per cent of the net folio additions happening in midcap and smallcap schemes in the previous six months. They added a net 6.3 million accounts compared to 16.6 million additions in the active equity fund space.

 

Even as small and midcap funds witnessed higher volatility compared to largecap funds in recent months, the fund returns have been comparatively higher. At the end of March, the average one-year return on active midcap and smallcap funds stood at 10 per cent and 7.7 per cent, respectively. In comparison, largecap funds delivered 6.7 per cent. The gap is much higher in longer time frames.

 

“The sustained investor interest in small and midcap funds over the past two years can be attributed to the generous returns that most of the investors have enjoyed post the Covid fall in March 2020,” said Siddharth Alok, AVP investments, Epsilon Money.

 

“While the near-term performance has deteriorated post the corrections, the longer-term performance is still attractive. Growing awareness of equity investing and better post tax returns may also be leading to investors sticking with their systematic investment plans,” said Krishnan.

 

Experts say that even as the volatility has eased, the valuations are still comparatively higher and liquidity concerns remain.

 

“It is important for investors to better comprehend the risks involved in these segments and invest in line with their risk appetite and asset allocation,” said Srivastava.