Record Midcap-Smallcap Inflows Defy 2025's Weak Returns

The mutual fund schemes focused on mid-cap and small-cap companies experienced a record level of inflow due to continued demand in spite of market volatility, the absence of FIIs, stretched valuations and poor earnings. The BSE MidCap index increased slightly, while the BSE SmallCap index decreased significantly when compared with the large-cap indices. 

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Weak Market Breadth Exposed

The majority of mid-cap companies listed on the BSE (in the mid-cap universe) experienced negative returns by the end of 2025. In fact, the majority of small-cap companies listed on the BSE had significantly negative returns. The BSE 100 index had a balanced performance based on the mid and small-cap funds' overall investible universe. Even though the indices had bad returns, retail and domestic SIP investors continued to create continuous investment commitments throughout the declines. 

Domestic Investors Dominate

The majority of the retail and domestic institutional investors went into mid-cap and small-cap schemes versus large-cap schemes. Foreign institutional investors continued to avoid the high valuation segments of the market, selling only the blue-chip stocks. Mid-cap companies captured a record amount of total equity inflows, equal to the small-cap category.

Long-Horizon Commitment Persists

Investors continue to invest more during market corrections, showing a preference for a 3 to 5-year return history as opposed to a short-term negative return. Mutual funds allow investors to have lower losses than if they invested directly into individual stocks. The high price of gold and silver has discouraged investors from making alternative long-term investments.

Structural Shift Underway

The dynamics of the market change when Home Grown Flow Dominance overtakes the market for two years. Additionally, SIP Discipline provides protection against the 16 months of underperformance in direct equity, with a major outperformance of mutual funds versus direct equity. Retail conviction shows optimism for the Capex Cycles despite the headwinds of tariff increases.