Smallcap and midcap funds now account for nearly 30% of active equity MF folios, as stock-market gains revive investor appetite for high-growth segments.
'Midcaps and smallcaps are the 'go-to segments' for retail investors.'
Active and passive funds offer different advantages across market-cap segments, making a mix of both a sensible portfolio strategy.
Small- and midcap stocks have delivered their biggest monthly rally in 12 years, but rising oil prices and global tensions could make the road ahead volatile.
The Indian stock market experienced a significant downturn, with the Sensex crashing over 1,000 points and the Nifty hitting a fresh 52-week low, driven by sustained selling from foreign institutional investors, the RBI's monetary policy tightening, and elevated Brent crude prices.
Smallcap funds topped the net inflow chart for the second consecutive month, as investors poured record Rs 7,973 crore into one of the best-performing MF categories.
Indian equity markets, led by the Nifty 50, saw gains following a pullback in Brent crude prices towards $101-102 a barrel and weaker-than-anticipated US jobs data, which eased concerns about a Fed rate hike. However, analysts caution that markets are likely to remain volatile in the near term.
Smallcap funds have emerged as the primary beneficiaries of the systematic investment plan (SIP) wave in Indian mutual funds over the past five years, with their SIP assets surging to approximately 1.83 trillion by March 2026, a fivefold increase.
Newly listed companies Vedanta Aluminium Metal, SBI Funds Management and Manipal Health Enterprises have entered the Rs 1 trillion mcap list since March 2026.
If India does get $100 billion a year in FDI, it would be a game-changer in every possible way. FPIs would come rushing back, AI or no AI, points out Debashis Basu.
IT services stocks have had tough two years, with prices coming under pressure from 2025 and the sell-off extending through the first half of 2026.
'India is vulnerable to the West Asia crisis in three ways: Energy costs, the business Indian companies conduct in the region, and remittances from the Indian diaspora.'
August 2026 witnessed a significant surge in India's primary market, with 21 mainboard initial public offerings (IPOs) raising approximately 21,000 crore, marking the highest monthly deal count of the year, even as benchmark indices experienced declines.
'Separate needs from wants and minimise discretionary spending.'
India's IT services industry is witnessing a surge in mergers and acquisitions, particularly among mid-cap companies, as AI-led pricing pressure and macroeconomic uncertainty compel firms to seek scale, capabilities, and broader market reach. This trend is exemplified by the recent merger of Happiest Minds Technologies and ITC Infotech, aiming to offer end-to-end solutions and compete for larger transformation programmes.
Equity mutual fund schemes in India attracted a net inflow of Rs 29,329 crore in August, marking the highest in four months, primarily fuelled by strong investor interest in mid-cap and small-cap funds.
Net inflows into smallcap funds surged 39 per cent M-o-M to a record Rs 7,768 crore, while midcap fund inflows rose marginally to Rs 6,192 crore.
Net SIP inflow is calculated by subtracting redemptions from gross SIP investments.
New dematerialised (demat) account additions in India reached a six-month high in July, with 2.89 million new accounts opened, driven by a buoyant initial public offering (IPO) market and a broad-based rally in equities.
The benchmark Sensex plummeted 813 points to a three-month low, with the Nifty settling below 23,450, as escalating tensions in West Asia drove crude oil prices above USD 100 per barrel, leading to widespread selling in IT, FMCG, financial services, and oil & gas shares.
"When you have more liquidity than good investment opportunities, there is no reason for MFs to sell a winning trade."
'Every period of excessive optimism eventually gives way to a correction, while periods of extreme pessimism often create the best investment opportunities.'
Fund managers advise conservative investors to cap midcap exposure at 10 to 15 per cent of their equity portfolio.
Roles that mention AI in software development have grown 138 per cent between Q2 2024 and Q2 2026.
BAFs seek to offer a smoother experience across market cycles, not the full upside of a bull market.
At Rs 4.07 trillion, gross inflows were just shy of the record Rs 4.34 trillion mobilised in H2 of 2024, making it the second half-yearly period in which inflows crossed Rs 4 trillion.
HDFC Bank's share in active mutual fund schemes has fallen to multi-year lows, despite overall MF ownership in the bank rising, as the stock faces weak performance, soft margins, and governance concerns.
IT stocks had their worst first half fall in decades, with the Nifty IT index declining 31% in the January-June 2026 period, its biggest decline in the first six months of a calendar year since 2003.
Systematic Investment Plan (SIP) returns for smallcap and midcap mutual funds have seen a significant rebound, with average one-year SIP returns now at 19.1 per cent for smallcap funds and 13.5 per cent for midcap funds, according to Value Research data. This recovery is expected to revive momentum in the retail mutual fund industry, which had experienced a moderation in growth indicators.
Liquidity stress in smallcap funds has fallen to its lowest level since February 2024, with the average time to liquidate 50% of portfolios dropping to 27 days in June from a peak of 44.2 days in January 2026, driven by a sharp recovery in smallcap stocks and increased trading volumes.
Foreign investors have largely been exiting one part of the market while domestic investors have been enthusiastically accumulating another, points out Debashis Basu.
Analysts predict that the Reserve Bank of India's interest rate decision, the evolving situation in West Asia involving the US-Iran conflict, and crude oil prices will be the primary factors influencing investor sentiment in the Indian stock market this week.
Despite trailing the benchmark Nifty 50, small and midcap (SMID) stocks appear pricey on a 12-month forward price-to-earnings (P/E) basis. The Nifty trades at roughly 21x forward earnings, compared with around 28x for both the Nifty Smallcap 100 and Nifty Midcap 100 indices.
In April alone, they snapped up shares worth Rs 19,664 crore, recording their biggest buy since October 2024.
rediffGURU Ulhas Joshi answers your mutual fund queries.
'Stopping now would defeat the core purpose of an SIP, which is to average out the purchase cost over market cycles.'
Accenture's revised annual revenue growth forecast and weaker-than-expected fourth-quarter guidance have sent shockwaves through the Indian IT sector, causing major IT stocks and the Nifty IT index to tumble significantly.
Indian benchmark indices Sensex and Nifty closed flat, paring early gains due to renewed hostilities between the US and Iran, which unsettled investor sentiment and led to profit booking in metal, oil & gas, and telecom shares.
Despite geopolitical tensions and FII outflows, Indian small and midcap stocks have not only recovered losses but are also outperforming largecap indices, driven by attractive valuations, domestic institutional support, and a rebound in earnings.
Most actively-managed equity mutual fund schemes outperformed their benchmarks despite volatility across domestic equity markets during the past year.
