The struggles for these shares come despite inflows of over ₹27,000 crore into midcap funds and over ₹31,000 crore into smallcap funds this year, as per the latest AMFI data until July. In 2024, midcap inflows stood at ₹34,303 crore, while smallcap fund flows were at ₹34,223 crore for the entire year.
Money managers said the underperformance despite inflows is mainly because of most of the money is being absorbed by a steady stream of share sales. “This year has seen significant supply from promoters, private equity investors and uptick in IPO activity in small and midcap categories,” said Ramesh Mantri, chief investment officer at WhiteOak Capital AMC. “While dedicated small and mid-cap funds remain exposed to these segments, other MF schemes and domestic institutional investors are allocating where the opportunities are more attractive, leading to additional pressure.” So far in 2025, IPOs have collected about ₹72,400 crore.
Mid- and small-cap stocks have been the top performers on Dalal Street in the bull run till September last year. While institutional and rich investors have turned cautious on the segments amid stake sales by promoters and large shareholders, individual investors continued to pour money despite concerns over-stretched valuations.
“We believe out of the three market drivers, fundamentals, flows, and sentiment, fundamentals and sentiment are suppressing mid and small caps despite strong inflows,” said Saurabh Rungta, chief investment officer, Avendus Wealth Management.
“Earnings recovery isn’t yet visible, and second quarter growth may also be pushed out as consumers defer purchases in anticipation of lower GST.” In the past year, the Nifty Midcap 150 and Nifty Smallcap 250 are down 2.8% and 7%, respectively. The Nifty 50 is also down 2.2%. REALLOCATION OF FLOWS
While flows show continued appetite for small-caps and midcaps stocks, there are early indications of a shift in preference to bluechips. “Investor preference is shifting to largecap equities which currently offer more attractive valuations and a stronger track record of resilience during periods marked by geopolitical risks, global trade tensions, and domestic economic slowdown,” said Mantri.
Retail investors holding direct stocks are cutting exposure to their mid-cap and small-cap stocks unlike their peers sticking with mutual fund schemes, said brokers.
“More recently, we are observing a clear trend of retail investors booking profits in mid and smallcap stocks and reallocating capital toward largecaps, particularly after widespread portfolio corrections,” said Pranay Aggarwal, director and CEO of Stoxkart. Aggarwal said this rotation may be in its early stages.
“Should market conditions remain subdued and mid and small-cap stocks continue to underperform, further shifts toward largecap exposure are likely in the coming months,” he said. Rungta said he has not yet seen any early signs of broad retail redemptions, but as one-year returns turn negative, the risk of a pullout rises, which may add further pressure.
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