Small-cap funds have delivered some eye-catching returns in recent years. But does that automatically make them better at creating alpha than mid-cap funds?
A comparison of direct plans tells a more nuanced story. While mid-cap funds have a slight edge in the 3-year return picture, small-cap funds pull ahead over 5 and 10 years. More importantly, the longer-term data shows that a much larger share of small-cap funds have beaten their benchmark.
For this analysis, we have looked at the direct plans of 34 mid-cap funds and 36 small-cap funds, using Value Research data. Since many newer funds do not have a long enough track record, the number of funds available for comparison changes across the periods.
The key question is simple: which category has been better at delivering returns above its benchmark — mid-cap or small-cap?
Mid-cap funds lead slightly over 3 years
Over the past three years, the 29 mid-cap funds in our analysis delivered an average annualised return of 19.47%, compared with 18.24% for 24 small-cap funds.
The benchmark returns were 17.47% for the Nifty Midcap 150 TRI and 16.77% for the Nifty Smallcap 250 TRI.
So, on a simple fund-return-minus-benchmark basis, the average mid-cap fund generated about 2 percentage points of outperformance, while the average small-cap fund generated about 1.47 percentage points.
| 3-year performance | Mid-cap | Small-cap |
| Funds analysed | 29 | 24 |
| Average fund return | 19.47% | 18.24% |
| Median fund return | 19.50% | 17.58% |
| Benchmark return | 17.47% | 16.77% |
| Average outperformance | 2.00 percentage points | 1.47 percentage points |
| Funds beating benchmark | 22 of 29 | 15 of 24 |
Source: Value Research. Data as of 27th August 2026
The difference is not huge, but mid-cap funds clearly have the edge on this three-year measure.
And there is another interesting point. 22 of the 29 mid-cap funds beat the Nifty Midcap 150 TRI, compared with 15 of the 24 small-cap funds that beat the Nifty Smallcap 250 TRI.
So if the story ended at three years, mid-cap funds would have the stronger alpha story.
But the picture changes when we go further back.
Small-cap funds take the lead over five years
Over five years, the average return of the 25 mid-cap funds available for analysis was 17.65%. The corresponding figure for 23 small-cap funds was 18.41%.
The small-cap category’s five-year benchmark returned 16.23%, while the Nifty Midcap 150 TRI returned 17.45%.
That means the average small-cap fund was ahead of its benchmark by around 2.18 percentage points, compared with just 0.20 percentage points for mid-cap funds.
| 5-year performance | Mid-cap | Small-cap |
| Funds analysed | 25 | 23 |
| Average fund return | 17.65% | 18.41% |
| Median fund return | 17.50% | 18.96% |
| Benchmark return | 17.45% | 16.23% |
| Average outperformance | 0.20 pp | 2.18 pp |
| Funds beating benchmark | 13 of 25 | 17 of 23 |
Source: Value Research. Data as of 27th August 2026
This is where the small-cap story gets stronger.
Not only is the category’s average return higher, but 17 of 23 small-cap funds beat their benchmark. For mid-cap funds, only 13 of 25 did so.
The median also matters here. A median return of 18.96% for small-cap funds means the typical fund in the middle of the group did better than the typical mid-cap fund, whose median was 17.50%.
The 10-year numbers make the difference even clearer
The longest period in our analysis gives small-cap funds their strongest showing.
There are 20 mid-cap funds and 13 small-cap funds with a 10-year return history in the direct-plan universe we are studying.
The average 10-year annualised return for small-cap funds was 17.88%, against 16.96% for mid-cap funds.
But the more interesting number is the benchmark outperformance.
The Nifty Smallcap 250 TRI delivered 15.15% CAGR over 10 years. The Nifty Midcap 150 TRI delivered 17.30%.
That means the average small-cap fund was ahead of its benchmark by around 2.73 percentage points. For mid-cap funds, the average was actually 0.34 percentage points below the benchmark.
| 10-year performance | Mid-cap | Small-cap |
| Funds analysed | 20 | 13 |
| Average fund return | 16.96% | 17.88% |
| Median fund return | 17.44% | 17.74% |
| Benchmark return | 17.30% | 15.15% |
| Average outperformance | -0.34 pp | 2.73 pp |
| Funds beating benchmark | 10 of 20 | 12 of 13 |
Source: Value Research. Data as of 27th August 2026
This is perhaps the strongest finding in the entire comparison.
Twelve of the 13 small-cap funds with a 10-year record beat their benchmark. Among mid-cap funds, it was exactly half — 10 out of 20.
That suggests the small-cap outperformance isn’t simply a recent phenomenon. At least among the funds with long enough histories, the category has produced a stronger benchmark-beating record.
But there is an important catch: the fund universe changes
There is a reason we cannot simply say “small-cap funds are better” based on the 10-year numbers.
The analysis does not cover 36 funds over all three periods.
We started with 34 mid-cap and 36 small-cap direct funds, but newer schemes don’t have enough history to qualify for the longer-period comparison.
| Category | 3-year | 5-year | 10-year |
| Mid-cap | 29 | 25 | 20 |
| Small-cap | 24 | 23 | 13 |
Source: Value Research
So the 10-year comparison is based on only 13 small-cap funds. These are the funds that have survived and maintained a sufficiently long track record.
That is important because the results could look different if newer funds eventually build a 10-year history.
In other words, the 10-year numbers tell us how the established funds performed, not how every fund currently available in the category would have performed over the past decade.
Small-cap’s alpha story gets stronger with time
Putting the three periods together gives us an interesting pattern.
| Period | Mid-cap average outperformance | Small-cap average outperformance | Stronger category |
| 3 years | 2.00 pp | 1.47 pp | Mid-cap |
| 5 years | 0.20 pp | 2.18 pp | Small-cap |
| 10 years | -0.34 pp | 2.73 pp | Small-cap |
Source: Value Research
This is the core of the story.
Mid-cap funds have done better against their benchmark over the recent three-year period. But when we stretch the period to five and 10 years, small-cap funds show a much stronger average outperformance.
The 10-year gap is particularly striking: about 2.73 percentage points of average annual outperformance for small-cap funds, against a negative 0.34 percentage points for mid-cap funds.
The number of winners tells the same story
Another way to look at alpha is simply to ask: how many funds actually beat their benchmark?
| Period | Mid-cap funds beating benchmark | Small-cap funds beating benchmark |
| 3 years | 22/29 (76%) | 15/24 (63%) |
| 5 years | 13/25 (52%) | 17/23 (74%) |
| 10 years | 10/20 (50%) | 12/13 (92%) |
Source: Value Research
This makes the longer-term small-cap story difficult to ignore.
In the 10-year sample, nearly nine out of 10 small-cap funds beat the Nifty Smallcap 250 TRI.
By comparison, only half of the mid-cap funds in the 10-year sample managed to beat the Nifty Midcap 150 TRI.
However, this should not be read as proof that small-cap funds will continue to outperform. The 10-year sample is small, and the funds with shorter histories are excluded.
What about the headline returns?
There is also a broader point worth making.
The difference between category returns and alpha is important.
For example, over three years, mid-cap funds delivered an average return of 19.47%, versus 18.24% for small-cap funds. That makes mid-cap look stronger.
But alpha asks a different question: how much of that return was above what the broader category benchmark delivered?
Because the small-cap benchmark itself delivered 16.77%, the average small-cap fund’s 18.24% return translated into about 1.47 percentage points of outperformance.
Similarly, the mid-cap benchmark delivered 17.47%, against an average fund return of 19.47%.
So investors should not judge a fund category only by its headline return. The benchmark matters.
The top end is also very different
The three-year numbers show just how powerful some small-cap funds have been recently.
The top small-cap fund in our dataset delivered 27.06% CAGR, followed by 26.48%, 25.00% and 23.69%.
The top mid-cap fund delivered 26.42%, followed by 26.09%, 24.61% and 24.13%.
So small-cap has produced some exceptional performers over three years.
But this is also where investors need to be careful. A few spectacular performers can attract a lot of attention, but they don’t necessarily tell us what the typical fund is doing.
That’s why the median and the number of funds beating the benchmark are useful alongside the top-return rankings.
So, which category wins?
If we look only at the last three years, mid-cap funds come out ahead.
They have a higher average return, higher median return, higher average benchmark outperformance and a larger proportion of funds beating their benchmark.
But over five years, small-cap funds move clearly ahead.
And over 10 years, the difference becomes even more pronounced: the average small-cap fund in our sample beat its benchmark by about 2.73 percentage points, while the average mid-cap fund lagged its benchmark slightly.
So the answer depends on the time frame.
For recent performance, mid-cap has the stronger story. For longer-term benchmark-beating performance, small-cap has the stronger alpha story.
But there is one more important caveat: alpha is not the same as lower risk or a better investment. Small-cap stocks can be more volatile and can fall sharply when market conditions turn. Past outperformance can also reverse, and a fund that has beaten its benchmark over five or 10 years may not necessarily do so in the next five or 10.
A word of caution for investors
These returns are historical and should not be treated as an indication of future performance. The comparison also does not mean that investors should simply pick the category with higher alpha.
Small-cap funds can carry higher volatility and liquidity risks, and fund performance can change with market cycles, portfolio strategy and valuations. Investors should look at risk, consistency, portfolio quality, investment horizon and their own ability to handle volatility along with returns before choosing between mid-cap and small-cap funds.
Note: The fund-level return figures are based on the direct-plan Value Research data supplied for this analysis. Benchmark comparisons use the Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI returns provided for the respective periods. “Outperformance” here is calculated as fund CAGR minus the relevant benchmark CAGR; it is a simple benchmark-relative measure and not the formal statistical alpha measure used in some performance models.
Disclaimer: Past performance does not guarantee future returns. The analysis is based on historical returns of direct mutual fund plans and their respective benchmarks. Investors should consider their risk appetite, investment horizon and other factors before making investment decisions.
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