IGI Logo

Despite periodic concerns over elevated market valuations, retail investors continue to demonstrate strong conviction in mid cap and small cap mutual funds, reflecting a growing preference for long term wealth creation, according to the latest research by ICRA Analytics.

The research, based on AMFI industry data, shows that investor participation in these categories has remained resilient over the past two years, supported by disciplined investing through Systematic Investment Plans (SIPs) and confidence in India's long term growth story. Investors are increasingly choosing to stay invested through regular SIPs, allowing the benefits of rupee cost averaging to mitigate the impact of short-term market volatility and valuation concerns.

The research also highlights that another key factor supporting investor interest is the view that many of today’s mid-cap and small-cap companies have the potential to emerge as tomorrow's large cap businesses. This expectation of superior long-term earnings growth continues to make these categories attractive despite intermittent market corrections.

Investor participation in these categories has strengthened significantly over the last two years. Mid cap fund folios increased from approximately 1.53 crore in June 2024 to 2.55 crore in June 2026, while small cap fund folios rose from around 2.03 crore to 2.87 crore during the same period. Together, these categories now account for more than 32% of all open-ended equity fund folios, making them among the preferred equity fund categories.

Average monthly net inflows into both categories have also remained robust over the past year, with mid-cap funds attracting around Rs. 4,777 crore and small-cap funds receiving approximately Rs. 4,776 crore every month, indicating sustained investors interest across market cycles.

The sustained investor preference is also reflected in the long-term performance of these categories. As of June 30, 2026, mid-cap funds generated a 3-year CAGR of 18.76% and a 5-year CAGR of 16.33%, while small-cap funds delivered a CAGR of 17.68% and 17.06%, respectively. In comparison, large-cap funds generated 10.65% and 10.22%, respectively, over the same periods. The relatively stronger long-term returns have reinforced investor confidence in mid-cap and small-cap funds as vehicles for long-term wealth creation.

Ashwini Kumar, Senior Vice President and Head Market Data, ICRA Analytics, said: "Despite elevated valuations, investor participation in mid cap and small cap funds continues to remain resilient, reflecting growing confidence in India's long term growth prospects. The increasing adoption of SIPs has fundamentally changed investor behaviour by encouraging disciplined investing and reducing the tendency to react to short term market volatility. While valuation risks cannot be ignored, investors continue to view these segments as an opportunity to participate in the next generation of India's growth companies."

The growing investor conviction is also reflected in assets under management (AUM). Mid cap fund AUM increased from Rs. 4.32 lakh crore in June 2025 to Rs. 5.06 lakh crore in June 2026, while small cap fund AUM rose from Rs. 3.55 lakh crore to Rs. 4.30 lakh crore during the same period. Although market appreciation contributed to this growth, sustained fresh investments remained a significant driver.

However, ICRA Analytics believes investors should continue to remain mindful of valuation risks. Elevated valuations could lead to periods of correction, higher volatility and relatively lower future returns if corporate earnings fail to meet market expectations. Consequently, future returns are likely to depend increasingly on sustained earnings growth rather than further expansion in valuations.

Overall, the latest industry data indicates that retail investors remain focused on India's long term growth opportunity. Rising folio counts, sustained inflows and increasing assets under management suggest that investors continue to prioritise discipline and long-term investing over short-term market concerns, reinforcing the structural appeal of mid-cap and small-cap mutual funds.

Above views are of the author and not of the website kindly read disclaimer