Over the past five years, small-cap funds delivered compound annual returns of 28.27%, while mid-cap funds returned 25.33%. Large-cap funds trailed at 17.75%. On a three-year basis too, mid- and small-cap categories posted nearly 19–20% returns, compared with 13.47% for large caps.
Though one-year returns were negative across the board — with small caps down 6.41%, mid-caps 3.95%, and large caps 3.77% — investors continue to favor smaller companies.
Data from the Association of Mutual Funds in India (AMFI) showed mid-cap funds attracting net inflows of ₹5,331 crore in August 2025, up 74.51% year-on-year. Small-cap funds followed closely with ₹4,993 crore, rising 55.57% over the same period. Large-cap funds, in comparison, saw inflows of ₹2,835 crore, a modest 7.51% increase.
Since the start of FY26, net inflows into mid-cap and small-cap schemes surged 55.01% and 22.01%, respectively, while large-cap inflows rose 14.34%.
This investor preference is mirrored in assets under management (AUM). Mid-cap funds’ AUM climbed 10.9% year-on-year to ₹4.27 lakh crore in August 2025, while small-cap funds grew 9.56% to ₹3.51 lakh crore. Large-cap funds expanded at a slower pace of 5.86%, reaching ₹3.90 lakh crore.
Why investors prefer smaller companies
Ashwini Kumar, Senior Vice President and Head of Market Data at ICRA Analytics, said that unlike large-cap firms, which are mature and tied to macroeconomic cycles, smaller companies offer greater scope for expansion and innovation.
“Small and mid-cap firms have greater room to expand, innovate, and capture market share, leading to higher earnings growth,” Kumar noted. “Moreover, they are frequently undervalued, offering better price-to-earnings ratios and return on assets compared to large caps.”
He added that recent government policies supporting MSMEs, improved disclosures, and regulatory reforms have boosted confidence in smaller companies, enhancing their appeal for retail investors.
Balancing risk and reward
While the data stresses strong investor appetite for small and mid-caps, analysts caution that these categories also carry higher volatility. For many retail investors, the promise of superior long-term growth appears to outweigh short-term risks.