Small- and mid-cap mutual funds gain nearly a third of India's active equity folios amid market rally

Small- and mid-cap mutual funds now account for almost 30% of India’s active equity folios, as retail investors seek higher growth in a rally driven by small and mid-cap stock outperformance, raising both opportunities and concerns over liquidity and risk.

Small and mid-cap mutual funds have climbed to nearly a third of all active equity folios in India, underscoring how retail investors have increasingly gravitated towards higher-growth corners of the market. As of July 2026, these funds held 55 million active folios, or almost 30% of the industry’s 187.3 million active equity folios, up from 19% in July 2022, according to Business Standard. The rise has been especially marked in recent months, with July bringing an 11-month high of 815,000 combined folio additions and record net inflows of nearly Rs 14,000 crore. The shift reflects a sustained preference for smaller companies at a time when many investors are willing to take on more risk in pursuit of stronger returns. Business Standard and Value Research data show the category has regained momentum after a sharp rally in small-cap and mid-cap shares since April 2026.

That rally has been a key driver. In financial year 2027 so far, the Nifty Smallcap 100 has risen 31% and the Nifty Midcap 100 has gained 22%, far ahead of the Nifty 50’s 9% advance, Business Standard reported. Other market trackers have also pointed to the same broad pattern of outperformance, although the exact year-to-date figures vary depending on the date of measurement. LiveMint reported that mid-cap and small-cap benchmarks have beaten the Nifty 50 in 2026, supporting the case for selective buying beyond large companies. The stronger index performance has, in turn, pulled fund returns back into more attractive territory, with Value Research data showing an average 1-year small-cap fund return of 15% and annualised 3-year and 5-year returns of 16%.

Fund managers and distributors say the recent inflows suggest that investors remain comfortable with the risk profile of the segment. Himanshu Srivastava of Morningstar Investment Research India told Business Standard that the willingness to put fresh money into these funds shows confidence in higher-growth parts of the market, while Mirae Asset Investment Managers’ Suranjana Borthakur said July’s pickup in small-cap inflows indicated that investors were still chasing growth opportunities even as broader flows eased. At the same time, the surge in interest has not been cost-free for other categories. Large-cap funds’ share of active equity folios has fallen to 9% in July 2026 from 14.4% in July 2022, suggesting that money has increasingly moved towards the more volatile end of the market.

The concentration of assets in small-cap and mid-cap funds has also revived long-running concerns about liquidity as schemes expand. Business Standard noted that Nippon India Smallcap Fund was managing Rs 79,000 crore at the end of June, while HDFC Smallcap and SBI Smallcap each had about Rs 40,000 crore. Analysts have warned for some time that rapid asset growth in less liquid segments can make it harder for fund managers to buy and sell holdings without affecting prices. ICRA Analytics data cited by Business Standard in July showed that mid-cap folios rose to 2.55 crore from 1.53 crore in June 2024, while small-cap folios increased to 2.87 crore from 2.03 crore over the same period, taking the two categories to more than 32% of all open-ended equity mutual fund folios.