Retail investors chase growth: Mid-Cap funds deliver 25% 5-year returns

Higher returns, structural tailwinds and increasing investor confidence encourage investors to park their funds in small-cap and mid-cap funds over large-cap funds: ICRA Analytics

Small and mid-cap mutual funds are drawing investor interest, with higher returns, structural tailwinds, and growing policy support making them more attractive than large-cap funds, according to ICRA Analytics.

Data from AMFI shows that while large-cap funds continue to provide stability, it is the small and mid-cap categories that are seeing stronger inflows and higher growth in assets under management (AUM).

"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," said the brokerage.

 

Small & Mid-Caps Outpace Large-Caps

 

Mid-cap funds’ AUM rose 10.9% year-on-year to ₹4.27 lakh crore in August 2025.

Small-cap funds’ AUM grew 9.56% year-on-year to ₹3.51 lakh crore.

In contrast, large-cap funds’ AUM increased just 5.86% year-on-year to ₹3.90 lakh crore.

Net AUM of mid-cap funds increased by 10.9% on yoy basis at Rs 4.27 lakh crore while that of small cap funds increased 9.56% yoy at Rs 3.51 lakh crore in August 2025

Inflows tell a similar story:

Mid-cap funds saw ₹5,331 crore in net inflows in August, up 74.51% YoY.

Small-cap funds attracted ₹4,993 crore in net inflows, a rise of 55.57% YoY.

Large-cap funds recorded ₹2,835 crore in net inflows, up only 7.51% YoY.

Since the beginning of FY25, net inflows into mid-cap and small-cap funds have risen 55.01% and 22.01%, respectively.

 

Returns Driving the Trend 

Even though all three categories show near-term corrections, mid and small caps have delivered superior 3-year and 5-year returns, widening the performance gap with large-caps.

Investors are clearly responding to performance:

“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 Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics.

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.

Investor Tip: Diversification across all three categories—large, mid, and small—can balance stability with growth potential. Risk tolerance and investment horizon should guide allocation decisions.