Record Funds Flow to Small & Mid-Cap Funds

In August, small- and mid-cap funds experienced a record influx of ₹14,960 crore, marking a significant shift as investors redirected capital from large-cap funds. This trend, reported by Elara Capital, saw small-cap funds attract ₹7,970 crore and mid-cap funds ₹6,990 crore, the highest amounts on record. Large-cap funds, conversely, faced outflows for the second consecutive month.

The reallocation indicates investors are not exiting the equity market but strategically moving funds from larger companies to smaller and mid-sized ones. This shift is further evidenced by the rapid increase in investor accounts for small- and mid-cap funds, while large-cap funds are seeing a net decline. Small- and mid-cap funds now constitute about 50%-55% of total inflows into actively managed equity funds.

However, the actual returns experienced by investors in these popular funds have fallen short of their headline net asset value (NAV) returns. For instance, median annualised NAV returns for top mid-cap funds were around 14% through August 2026, but flow-adjusted returns were only about 4%. A similar disparity was observed in small-cap funds, with median NAV returns of 9.5% versus flow-adjusted returns of 4.4%. This suggests investors may be buying into funds after strong performance, leading to lower actual gains.

While the continued domestic investment in small- and mid-cap funds could sustain their performance, concerns remain regarding high valuations and the increasing dependence on domestic investor favour. The concentration of inflows into a few top schemes further adds to the dynamic of this market segment.