Investors double down on riskier bets: Inflows into smallcap, midcap funds hit all-time high

AMFI equity fund inflows

Ignoring warnings of smallcap and midcap stocks being overvalued, mutual fund investors continued to pile into these categories, as overall equity fund inflows hovered near the Rs 40,000-crore level in January.

Equity mutual funds were almost steady in January at Rs 39,687.78 crore, 3.6 percent lower than the previous month despite the markets coming under heavy selling pressure, data released by the Association of Mutual Funds of India (AMFI) on February 12 shows.

In the equity fund category, inflows into smallcap funds jumped 22.6 percent at Rs 5,720.87 crore, a record high, in January. Midcap funds saw a marginal rise to Rs 5,147.87 crore, which again was an all-time high. Net investment in largecap funds surged 52.3 percent to Rs 3,063.33 crore, which is the second-highest level.

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With a sustained fall in equities, most smallcap funds have been showing negative returns on their one-year Systematic Investment Plans (SIPs) over the past six months.

This has left investors worried, as they have poured in close to Rs 35,000 crore into active smallcap funds in 2024, nearly double the inflows into the largecap funds.

Many experts have been warning on the bubble formation in the risker segments of the market.

Speaking at IFA Galaxy 2025 earlier, an event organised by a Chennai-based mutual fund association, ICICI Prudential Mutual Fund Chief Investment Officer S Naren advised caution regarding SIP investments in mid and small-cap stocks. “We think it is a clear time to take out lock, stock, and barrel from small- and mid-caps,” he said.

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According to Himanshu Srivastava – Associate Director- Manager Research, Morningstar Investment Research India, investors’ focus towards making the most of the market fall in January can also be gauged from the fact that around 30.7 lakh new folios were added in January.

The performance of the equity markets and the returns that equity-oriented mutual funds have generated in the last few years have motivated several investors to enter into the equity markets.

“Since both the segments (smallcap and midcap) witnessed sharp correction, investors would have chosen to make use of this opportunity and enhance their exposure to these segments. However, investors should be wary of inherent risk in these segments and be judicious while investing. The investment in midcap and smallcap funds should be in line with their risk appetite,” said Srivastava.

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“While large caps are more attractive from the valuation perspective, they are more stable from the asset allocation perspective and during volatile market compared to their mid and small cap counterparts. These two factors would be playing a crucial role in investors' decision to have a reasonable exposure in large cap segment as well,” he added.

Smallcap index has corrected by more than 13 percent from its peak, but there is no slowdown in inflows from this segment.

“Despite these hurdles, the steadfast commitment of domestic investors through SIPs underscored a deeper confidence in the long-term potential of the Indian economy. This resilience not only cushioned the impact of external shocks but also painted a promising picture of the future, where domestic participation is seen strengthening the foundation of India’s financial markets,” said Viraj Gandhi, Chief Executive Officer at Samco Mutual Fund.