"When you have more liquidity than good investment opportunities, there is no reason for MFs to sell a winning trade."
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.
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.
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.
'Midcaps and smallcaps are the 'go-to segments' for retail investors.'
Smallcap funds give investors access to businesses that can grow much faster than the broader economy.
Investors now have 27 passive smallcap funds to choose from 17 index funds and 10 ETFs.
Most actively-managed equity mutual fund schemes outperformed their benchmarks despite volatility across domestic equity markets during the past year.
The remarkable rise of smallcaps reflects the emergence of a broad set of specialised businesses operating in industries where the sectoral tailwinds remain considerably stronger than macroeconomic headwinds, points out Debashis Basu.
'Except for extremely conservative investors, others can consider allocating 10 to 20 per cent of their portfolio to small caps.'
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.
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.
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.
'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.'
The BSE Smallcap index hit an over eight-month low of 47,627.96, falling 3 per cent in Tuesday's intraday trade amid selling pressure due to ongoing tariff-related concerns and rising geopolitical tensions.
Unless the primary market momentum slows, smallcap stocks will stay subdued.
'A favourable base, last year's policy measures, the carryover impact of a good monsoon and improving earnings should all help.'
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.
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.
After two years of strong gains, smallcap stocks fell sharply in 2025, but the correction may be setting up opportunities for long-term investors.
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.
Over 50 per cent, or 660 stocks, from the BSE 1000 index recorded negative returns during CY25.
Investors seeking higher returns at relatively higher risk should consider allocation to smallcap equity funds.
Companies in the lower mcap deciles have recorded the fastest growth in median mcap.
Foreign investors have largely been exiting one part of the market while domestic investors have been enthusiastically accumulating another, points out Debashis Basu.
This marks a rebound after more than two years of underperformance during a strong rally in smallcap stocks.
'The market is currently neither cheap enough to be exciting about nor expensive enough to worry about.'
Indian benchmark indices, Sensex and Nifty, staged a moderate rebound after a significant correction in the previous session, driven by foreign fund inflows and a largely positive trend in global markets, though geopolitical tensions between the US and Iran continued to foster caution.
In April alone, they snapped up shares worth Rs 19,664 crore, recording their biggest buy since October 2024.
'Defence, capital goods, engineering, capital market-related stocks, autos, and cement sectors are my bullish bets for Samvat 2082.'
Net mutual fund inflows into active equity schemes in India plummeted by 40 per cent month-on-month in May, reaching a one-year low of 22,908 crore, primarily due to weaker lump-sum investments and increased redemptions amidst significant market volatility and global uncertainties.
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.
Net investments into equity mutual fund schemes in India remained elevated at approximately 38,440 crore in April, despite a slight dip from March's high and a 3% month-on-month decline in Systematic Investment Plan (SIP) inflows.
Amidst a sharp run-up in gold and silver prices, investors are advised to rebalance their portfolios by booking partial profits in precious metals and reallocating to domestic equities and debt, according to financial experts.
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.
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.
LAMF allows investors to access liquidity while staying invested.
'... with the rest split between mid and smallcaps, as valuations are becoming more attractive across segments.'
Domestic Institutional Investors (DIIs) have significantly increased their holdings in Nifty 500 companies, reaching a record 20.9 per cent by the end of March, while Foreign Portfolio Investors (FPIs) reduced their ownership to an all-time low of 17.1 per cent, according to Motilal Oswal Financial Services.
Indian investors have seen their wealth erode by a staggering Rs 16.77 lakh crore over four trading sessions, as the markets faced deep losses driven by elevated crude oil prices, geopolitical tensions, persistent foreign fund outflows, and a record-low rupee.
