This has been driven by strong investor inflows and mark-to-market gains from a sustained broader market rally.
Active mid and smallcap funds had a combined AUM of Rs 9.8 trillion at the end of September 2026 compared to Rs 2.5 trillion in September 2021. In the same period, their combined share in active equity AUM rose from 19.6 per cent to 26 per cent. Experts see the growth momentum sustaining. The industry currently manages another Rs 35,000 crore through passive mid and smallcap funds. Investor appetite for these two relatively high-risk categories has risen over the past four years, buoyed by strong returns.
Interest has picked up further in recent months as the broader market rebounded sharply after March 2026.
In September, smallcap funds saw a record net inflow of Rs 9,039 crore, while midcap funds attracted Rs 7,835 crore.
So far this year, smallcap funds have seen net inflows of Rs 55,300 crore, while midcaps have seen flows of Rs 51,295 crore. In comparison, largecap funds have attracted only Rs 11,690 crore.
Valuations show a mixed story. While the Nifty Smallcap 250 index, the smallcap benchmark, is currently trading at 30.9 times trailing 12 months (TTM) price-to-earnings (P/E), it is at a premium to its five-year average P/E of 28.2 times. It remains lower than its 10-year average of 34 times. However, at 30.6 times P/E for the mid-cap benchmark, the Nifty Midcap 150 index, it is still cheaper than its five-year and 10-year averages of 33.5 times and 36.9 times respectively. The Nifty 50 is trading at 20.1 times P/E, lower than its five- and 10-year average price to earnings ratios. Yet, money managers are not too keen to write off small and midcap indices.
Vipul Bhowar, executive director and head of equities at Waterfield Advisors, said he doesn’t expect flows into mid and smallcaps to moderate soon. “Despite elevated valuations, we believe valuations remain reasonable relative to growth. These are also segments where companies have invested meaningfully in growth over the past three years, and that investment is now beginning to pay off,” he said.
“With sufficient new supply, including most of the recent initial public offerings (IPOs), the segment has been able to absorb domestic inflows.”
Broader markets have also outperformed the Nifty in 2026, as rampant foreign selling, and global geopolitical pressures have weighed more on the Bluechips.
The Nifty has declined 13.1 per cent in 2026 so far, while the Midcap 150 is down 2.4 per cent. The Nifty Smallcap 250 has gained nearly 7 per cent this year.
“Valuations in these segments are somewhat above comfort levels following the recent run-up. This is partly justified by stronger earnings growth and relatively lower exposure to geopolitical and macro concerns weighing on largecaps,” said Harsh Gupta Madhusudan, Chief India Strategist, Ionic Asset.
However, fund managers do not see the trend changing anytime soon.
Mayur Shah, portfolio management services (PMS) fund manager at Anand Rathi Advisors said while largecaps now offer more comfortable valuations, he doesn't expect a wholesale shift away from mid and smallcaps.
“The segment continues to offer stronger growth prospects, which remains a key attraction for investors,” he said.
He added, “Valuations in themes such as power, automation, artificial intelligence (AI), data centres and defence have become stretched, but investor interest remains over their growth potential and relative attractiveness versus other asset classes.”
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