Mid-cap and small-cap mutual funds have emerged as two of the most rewarding equity fund categories over the past decade, outperforming all other categories like thematic, large and mid-cap funds, ELSS, flexi cap, multi-asset allocation, and more.
Over the last 10 years, both mid-cap and small-cap mutual fund categories have delivered almost identical annualised returns. According to the data of Value Research, small-cap funds generated an average CAGR of 16.69%, marginally ahead of 16.00% delivered by mid-cap funds.
The data also shows that only the small-cap fund has beaten its respective benchmark over the 10-year period, as small-cap funds surpassed the BSE 250 SmallCap Total Return Index, which posted 15.39% annualised returns, whereas mid-cap funds underperformed the BSE 150 MidCap Total Return Index, which returned 17.77%.
One of the biggest takeaways from the last decade is that both categories rewarded investors who stayed invested despite market corrections.
However, these higher returns have usually come with significantly higher volatility.
Top 5 performing mid-cap funds in 10 years
| Mid-Cap Funds | 10-Year Returns In % | Benchmark Returns In % |
| Invesco India Mid cap Dir | 20.46 | 17.77 |
| Edelweiss Mid Cap Dir | 19.96 | 17.77 |
| Nippon India Growth Mid Cap Dir | 19.41 | 17.77 |
| Kotak Midcap Dir | 19.02 | 17.77 |
| HDFC Mid Cap Dir | 18.66 | 17.77 |
Source: Value Research as of 10th July
On the other hand, the mid-cap funds that have performed the worst over the past decade are the ABSL Mid Cap fund, Taurus Mid Cap fund, UTI Midcap fund, and SBI Midcap Fund.
Top 5 performing small cap funds in 10 years
| Small-Cap Funds | 10-Year Returns In % | Benchmark Returns In % |
| Nippon India Small Cap Dir | 21.77 | 15.39 |
| Quant Small Cap Dir | 21.02 | 15.39 |
| Axis Small Cap Dir | 19.9 | 15.39 |
| SBI Small Cap Dir | 19.25 | 15.39 |
| HDFC Small Cap Dir | 18.47 | 15.39 |
Source: Value Research as of 10th July
The small-cap funds that performed the worst over a 10-year period, according to Value Research charts, are the ABSL Small Cap fund, Franklin India Small Cap fund, and Sundaram Small Cap fund.
Risks and volatility
A comparison of the category averages shows that mid-cap and small-cap funds delivered nearly identical mean returns, but they differed in terms of volatility and risk-adjusted performance.
The small-cap category posted a marginally higher mean return of 19.88%, compared with 19.94% for mid-cap funds.
However, the biggest difference lies in volatility in the last 3-year period, according to Value Research.
The mid-cap category recorded a standard deviation of 17.88%, significantly lower than the 20.33% registered by the small-cap category. This indicates that mid-cap funds experienced relatively smoother return fluctuations, whereas small-cap funds were more volatile and prone to larger price swings.
The mid-cap category posted a Sharpe ratio of 0.79, compared with 0.69 for small-cap funds.
A higher Sharpe ratio means investors earned more return for every unit of total risk taken. This suggests that mid-cap funds generated returns more efficiently despite offering almost the same average return as small-cap funds.
Both fund categories have recorded a Sortino ratio of 1.03. An identical Sortino ratio indicates that both categories delivered similar returns after accounting only for downside risk. Although small-cap funds were more volatile overall, their downside-risk-adjusted performance matched that of mid-cap funds.
From the above analysis of risk factors, we can find that while both mid-cap and small-cap funds have delivered comparable long-term returns, mid-cap funds stood out on the risk front.
“Volatility in mid-cap and small-cap funds should not discourage investors from investing in these categories, as market corrections are a normal part of market cycles. If we look at the last 10 years, both categories have had a beta of around 0.2, showing that they have not been as volatile relative to the broader market as many investors believe,” said Subhendu Harichandan, Executive Director, Anand Rathi Wealth.
Hence, instead of avoiding these categories, investors should focus on building a well-diversified portfolio with a balanced exposure across all market caps.
Mid-cap vs small-cap: Which category generates more alpha?
Mid-cap and small-cap funds have consistently outperformed the broader market over the long term.
“Mid-cap funds beat the Nifty 50 in 93% of one-year periods and in 100% of three, five and ten-year periods, while small-cap funds outperformed the Nifty 50 in 97% of one-year periods and 100% of three, five and ten-year periods. This highlights the alpha generation potential of both categories for investors willing to stay invested over a full market cycle,” said Harichandan.
If we look at their respective benchmark performance can be competitive, where over 10 years, 92% of small-cap funds outperformed their benchmark, while the figure for mid-cap funds stood at 20%, Subhendu Harichandan further added.
Hence, investors should look at the long term to understand the performance of these categories as their ability to generate alpha becomes much more evident over longer holding periods.
The case for diversification
The best way to invest in mid-cap and small-cap funds is to own them as part of a diversified portfolio rather than treating them as standalone bets.
For example, consider two investors with a Rs 10 lakh portfolio.
Investor A has the entire portfolio invested in small-cap funds, while Investor B follows a diversified allocation of 55% in large caps, 23% in mid caps and 22% in small caps. As of 30 March 2026, over the previous one year, the Nifty 50 declined by 3.6%, the Nifty Midcap 150 gained 2.64%, while the Nifty Smallcap 250 declined by 4.93%.
Investor A would have seen the entire portfolio fall by 4.93%, whereas Investor B’s portfolio would have declined by only around 2.4%. Hence, this highlights how investors can diversify across market caps for a balanced exposure to mitigate risk.
“Both mid and small cap categories have rewarded investors over the long term and have consistently outperformed the Nifty 50, but that potential is best captured through diversification and by staying invested across market cycles rather than trying to time entries and exits,” stated Harichandan.
Word of caution
Investors with a long-term investment horizon should not wait for the “perfect” time to invest. If they have funds available, then they should go ahead and invest, and if they are doing SIPs, they can continue the same.
Over the last decade, both mid-cap and small-cap funds have consistently outperformed the broader market, suggesting that disciplined investing and diversification have historically been more important than attempting to pick the single best-performing category.
The choice between mid-cap and small-cap mutual funds should depend on your investment horizon, risk appetite, and financial goals rather than on past returns alone. While both categories have delivered strong long-term performance, they cater to different types of investors.
Investors should avoid making emotional decisions based on short-term market movements, and they can diversify their portfolio to ensure balanced exposure.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
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