Mid-, small-cap fund craze: Folios jump by 2 cr despite valuation worries | Personal Finance

Retail investors are showing little sign of backing away from mid-cap and small-cap mutual funds, despite repeated concerns over stretched valuations and the possibility of market corrections.

Data compiled by ICRA Analytics from the Association of Mutual Funds in India (AMFI) shows that mid-cap fund folios surged by over 66 per cent to 2.55 crore in June 2026 from 1.53 crore in June 2024, while small-cap fund folios rose to 2.87 crore from 2.03 crore, an increase of more than 40 per cent during the same period.

Together, the two categories now account for more than 32 per cent of all open-ended equity mutual fund folios, highlighting retail investors’ growing preference for higher-growth equity funds.

The trend has been supported by steady inflows through Systematic Investment Plans (SIPs). Over the past year, mid-cap funds attracted average monthly inflows of Rs 4,777 crore, while small-cap funds received Rs 4,776 crore, indicating that investors have continued investing despite concerns over elevated valuations.

Why are investors still buying?

The appeal lies in returns.

As of June 30, 2026, mid-cap funds delivered a three-year CAGR of 18.76 per cent and a five-year CAGR of 16.33 per cent. Small-cap funds returned 17.68 per cent and 17.06 per cent, respectively, over the same periods.

By comparison, large-cap funds generated 10.65 per cent over three years and 10.22 per cent over five years, making mid- and small-cap funds the top-performing diversified equity categories over the longer term.

Investors are also betting that many mid-sized and smaller companies could emerge as the next generation of large-cap businesses, supporting long-term earnings growth.

But should you invest now?

While investor participation continues to rise, ICRA Analytics cautioned that high valuations leave little room for disappointment. If corporate earnings fail to keep pace with market expectations, these segments could witness sharper corrections and higher volatility than large-cap funds.

Ashwini Kumar, Senior Vice-President and Head-Market Data at ICRA Analytics, said the growing adoption of SIPs has encouraged disciplined investing and reduced the tendency among investors to react to short-term market swings. However, he noted that future returns are likely to depend more on earnings growth than on further expansion in stock valuations.

” Despite elevated valuations, investor participation in mid cap and small cap funds continues to remain resilient, reflecting growing confidence in India’s long term growth prospects. The increasing adoption of SIPs has fundamentally changed investor behaviour by encouraging disciplined investing and reducing the tendency to react to short term market volatility. While valuation risks cannot be ignored, investors continue to view these segments as an opportunity to participate in the next generation of India’s growth companies,” said Kumar.

The growing investor conviction is also reflected in assets under management (AUM). Mid cap fund AUM increased from Rs. 4.32 lakh crore in June 2025 to Rs. 5.06 lakh crore in June 2026, while small cap fund AUM rose from Rs. 3.55 lakh crore to Rs. 4.30 lakh crore during the same period. Although market appreciation contributed to this growth, sustained fresh investments remained a significant driver.

18.76% CAGR

Highest among all diversified equity categories.

That’s why investors continue pouring money into them.

2. Small-cap funds dominate over five years

Small-cap funds delivered

17.06% CAGR (5 years)

compared with

Large-cap funds: 10.22%

That’s a gap of almost 7 percentage points annually.

3. Large-cap funds have underperformed

Large-cap funds returned

• 
  -3.67% over one year
• 
  10.65% over three years
• 
  10.22% over five years