Equity Mutual Funds see 335% growth in 5 yrs; Small-Cap funds lead returns

Equity mutual funds witness significant surge in inflows backed by sustained investor interest to achieve long-term wealth creation: ICRA Analytics

Despite market volatility, equity mutual funds (MFs) have emerged as a preferred wealth creation tool for Indian investors. According to ICRA Analytics, the net Asset Under Management (AUM) of equity mutual funds surged by 335.31% over the last five years, touching ₹33.32 lakh crore in July 2025, compared with just ₹7.65 lakh crore in July 2020.

 

"SIPs have become a popular tool for managing volatility, allowing investors to invest a fixed amount regularly, benefiting from rupee cost averaging i.e. buying more units when prices are low and fewer when prices are high", ICRA Analytics said in a note. 

 

Inflows into equity mutual funds have witnessed a steady rise growing from an outflow of (Rs 3,845 crore) in July 2020 to an inflow of Rs 42,673 crore in July 2025. On a year-on-year basis, inflows have increased by 15.08 per cent from Rs 37,082 crore in July 2024, while month-on-month, it has gone up by nearly 81.06 per cent as compared with Rs 23,568 crore in June 2025.

 

 

"Inflows into equity mutual funds has witnessed a sharp rise in the last few years as investors are increasingly adopting a long-term perspective, recognizing that short-term market fluctuations are part of the journey toward wealth creation. Historical data shows that markets tend to recover and reward patient investors over time. Sectoral/thematic funds drew the highest inflows at Rs 9,426.03 crore as investors, particularly in the retail segment, continue to seek new growth opportunities and explore avenues to generate alpha or higher returns. This was followed by flexi cap funds and small cap funds which attracted inflows to the tune of Rs 7,654.33 crore and Rs 6,484.43 crore respectively as investors prefer diversified allocation and higher returns," said  Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics.

 

SIPs Cushion Investors from Market Volatility

 

One of the key drivers of this surge has been the rising popularity of Systematic Investment Plans (SIPs). SIPs allow investors to commit a fixed monthly amount, benefiting from rupee cost averaging—buying more units when prices are low and fewer when prices are high.

 

Inflows Rising Consistently

 

ICRA Analytics data shows inflows into equity MFs have strengthened significantly:

 

In July 2020, the industry recorded net outflows of ₹3,845 crore.

 

By July 2025, this had reversed to inflows of ₹42,673 crore.

 

Year-on-year, inflows rose 15.08% (₹37,082 crore in July 2024).

 

Month-on-month, inflows grew nearly 81%, compared with ₹23,568 crore in June 2025.

 

Where the Money is Flowing

 

Among categories, sectoral/thematic funds attracted the highest inflows of ₹9,426 crore in July 2025. This was followed by:

 

Flexi Cap Funds: ₹7,654 crore

 

Small Cap Funds: ₹6,484 crore

 

Why Equity MFs Beat Traditional Savings

 

Equity MFs have consistently outperformed traditional instruments like fixed deposits. Even during volatile phases, three-year returns across categories have remained strongly positive, making them attractive for younger and risk-tolerant investors.

 

Here’s a snapshot of average returns (as of July 2025): 

Returns as on July 31, 2025. Source: MFI360Explorer

 

The standout performers in the past five years have been small-cap funds (31.7%) and mid-cap funds (27.36%), followed by multi-cap and contra/value funds, which consistently generated returns above 24%.

 

Key Takeaways for Retail Investors

 

Stay Long Term: Equity MFs reward patience. Short-term volatility is natural but long-term compounding works in your favour.

 

Use SIPs Wisely: SIPs help reduce timing risk and build wealth steadily. Increasing SIP amounts with rising income accelerates wealth creation.

 

Diversify: Don’t bet only on small or thematic funds. A mix of large-cap stability + mid/small-cap growth works best.

 

Compare with FDs: While fixed deposits today offer around 6-7% returns, MFs have delivered 20-30% CAGR in some categories over five years, significantly outperforming.

 

Avoid Panic Selling: Investor exits during corrections can magnify losses. Discipline is key.

 

Long-Term Outlook

 

Despite global uncertainties, domestic investors remain optimistic about India’s growth story. The AUM of equity mutual funds has more than quadrupled in just five years, and with continued SIP inflows, the industry is poised for even stronger growth in the decade ahead.

 

As Kumar of ICRA Analytics summed up:

“Markets tend to reward patience. The disciplined investor who treats volatility as opportunity, not risk, will be the ultimate winner in wealth creation.”