Midcap funds: Invest amid valuation comfort, strong earnings growth outlook

Enter with 10-year horizon; exposure can range from 20-40 per cent of portfolio, depending on risk appetite

The midcap segment of the equity market continues to command investors’ attention. Midcap funds recorded inflows of ₹5,330 crore in August 2025 — the highest ever in a single month, according to the Association of Mutual Funds 

in India (Amfi). 

“Inflows in midcap funds have been very consistent at around 8-9 per cent of total equity net inflow over the past four to five years. In August, it was even higher at around  11 per cent. This clearly shows the increased conviction and maturity of investors around this category, which has strong earnings growth potential over the medium term,” says  Ankit Jain, senior fund manager, Mirae Asset Investment Managers (India).

 

Midcap schemes invest at least 65 per cent of their corpus in companies ranked between the 101st and 250th by market capitalisation. As of August 31, 2025, a total of 67 midcap schemes managed assets 

worth ₹4.44 trillion. 

Rewarding over long term 

While high inflows during periods of uncertainty may appear counter-intuitive, it may reflect investors’ maturity and willingness to take calculated risks. “We believe uncertain times offer better opportunities to invest and reap the benefits of future stability,” says Kirti Dalvi, equity fund manager, Mahindra Manulife Mutual Fund. 

Growth potential 

As the economy expands, many midcap firms evolve into large companies with stronger balance sheets and proven earnings track records. Many sectoral leaders belong to this segment. “There is growing belief that today’s mid-cap companies are tomorrow’s large-caps, which makes the segment aspirational,” says Vishal Dhawan, founder and chief executive officer, Plan Ahead Wealth Advisors. 

“The Indian economy’s growth path, along with rising per capita income, offers a space for many emerging businesses to grow relatively faster, with visibility of sustaining that performance in the near future,” says Dalvi. 

Valuations offer comfort 

The recent market correction has brought down valuations to levels better suited for entry. “With the past one year of time correction, valuations have become much more attractive, from around 35x price-to-earnings (P/E) in September 2024 to 28x, which is around 15 per cent premium to the historical average. This is quite reasonable in the context of decent future earnings growth potential,” says Jain. 

“Valuation premium of the mid-cap index vis-à-vis the large-cap index has corrected from July 2024 to July 2025, offering some valuation comfort — especially considering midcap earnings are currently growing at 14-16 per cent, compared to 6-8 per cent for large caps,” says Dalvi. 

Volatility remains a risk 

Midcaps are prone to sharper declines than large-caps in falling markets. “The downside is higher volatility and risk of sharp drawdowns, with history showing peak-to-trough declines of 40-50 per cent in bear markets. Domestic systematic investment plan (SIP) inflows are likely to remain strong and provide stability, but geopolitical events and global shocks could create volatility, given the higher sensitivity of mid-caps compared to large-caps,” says Dhawan. 

Suitable for risk takers 

Midcap funds are suited for investors with a higher risk appetite and longer horizons. “Midcap funds should be avoided by those with shorter horizons or low tolerance for volatility. Ideally, a long investment horizon of at least 10 years is recommended. A typical equity portfolio can carry about 20 per cent in mid-caps, with aggressive investors going up to 40 per cent when valuations are lower,” says Dhawan. 

Multicap, flexicap, and hybrid schemes already provide some midcap exposure. Investors should factor in this overlap before committing to a dedicated mid-cap fund. Invest via SIPs  to manage volatility. 

 

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The writer is a Gurugram-based independent journalist