Smaller flexi cap funds outperformed their larger peers during a period when mid- and small-cap stocks held up better than large caps, while foreign investor selling weighed on India’s biggest companies.
Experts, however, caution that this reflects the current market cycle and portfolio positioning, rather than suggesting that smaller funds are inherently better investments.
Investor interest in flexi cap funds remains strong
The trend comes at a time when investors continue to allocate money to actively managed equity funds.
According to data from the Association of Mutual Funds in India (AMFI), equity mutual funds continued to see strong inflows, with investors showing sustained interest in categories that provide exposure beyond the largest companies.
Mid-cap funds have been among the preferred categories.
They received inflows of ₹6,090.2 crore in June, up from ₹4,385 crore in the previous month, as per AMFI data.
Flexi cap funds have also remained popular because they allow fund managers to dynamically change allocations depending on valuations and market opportunities.
Market rotation created a gap between fund strategies
The recent divergence in flexi cap fund performance is closely linked to the broader equity market rotation.
Over the past year, mid- and small-cap stocks outperformed large caps as foreign portfolio investor (FPI) selling was concentrated largely in bigger companies, where overseas investors traditionally have higher ownership.
According to research by Valtrust, a multi-family office and asset management firm, the Nifty Midcap 150 delivered returns of around 5% over the past year, while the Nifty Smallcap 250 also remained positive, even as the Nifty 50 declined.
Morningstar’s mutual fund category analysis has also highlighted the impact of market leadership on fund performance, with equity categories delivering different outcomes depending on their exposure to the market segments that performed better during the period
What Valtrust’s analysis of 38 flexi cap funds shows
Valtrust Research analysed 38 flexi cap schemes and grouped them into three categories based on assets under management (AUM).
The analysis found that the largest funds dominated the category in terms of assets. The top one-third of flexi cap funds accounted for ₹4.69 lakh crore, or 84.3% of the category’s total AUM of ₹5.57 lakh crore.
Yet, these funds delivered average one-year direct plan returns of only 0.5% as of July 3, 2026.
In comparison, the smallest one-third of funds, which managed just ₹15,877 crore or 2.9% of category assets, delivered average direct plan returns of 2.7%.
| Fund size category | Total AUM | Share of category AUM | Average 1-year direct return |
| Small AUM funds | ₹15,877 crore | 2.90% | 2.70% |
| Mid AUM funds | ₹71,616 crore | 12.90% | 3.00% |
| Large AUM funds | ₹4.69 lakh crore | 84.30% | 0.50% |
(Source: Valtrust Research. Returns as on July 3, 2026. AUM and allocation data as on May 31, 2026)Why did smaller funds get an advantage?
The difference was visible in portfolio allocation.
The largest flexi cap funds had an average 62.1% allocation to large-cap stocks, while smaller funds had relatively higher exposure to mid- and small-cap stocks.
Small AUM funds had an average 43.8% exposure to mid- and small-cap stocks, compared with 31.2% for the largest funds.
Rahul Bhutoria, Director and Co-founder of Valtrust, said the recent market phase favoured funds with greater flexibility to allocate to smaller companies.
“Flexi cap funds with larger AUM have underperformed smaller peers over the past year because size pushes bigger funds towards a higher large-cap allocation. Smaller funds have more room for mid- and small-cap bets, and those segments have rallied harder in this phase.”
Does a larger fund size hurt returns?
Experts point out that a larger AUM can be an advantage because it often reflects investor confidence, scale and established investment processes.
At the same time, deploying very large amounts of money across smaller companies can become challenging because of liquidity constraints.
Bhutoria said the recent difference in returns reflects where the valuation and flow cycle stands.
“A single year’s performance is not the full picture. FIIs have traditionally held their largest ownership in India’s biggest companies, and the past year saw significant FPI equity outflows, with a large share of selling concentrated in large caps.”
He added that large-cap valuations have become more attractive after the correction, while several mid- and small-cap pockets remain above their long-term averages.
What should investors do?
The recent performance gap offers an important lesson for investors: a mutual fund’s recent return is often a reflection of the market environment in which it operated.
Investors should not choose a flexi cap fund solely because it delivered better returns over the past year or because it has a smaller or larger AUM.
Instead, factors such as long-term performance across market cycles, portfolio quality, risk management, expense ratio, investment philosophy and the consistency of the fund manager remain more important.