Investors pile into small, mid-caps as earnings momentum improves

Investors are increasingly favoring small-cap and mid-cap stocks over large-cap counterparts, driven by improving earnings momentum and increased market liquidity, according to recent data. In the current fiscal year, nearly ₹25,200 crore was invested in small-cap funds during the first four months, nearly half of the ₹51,000 crore invested in the entire FY26.

Mid-cap funds saw ₹23,218 crore in inflows, representing nearly 44% of the ₹52,800 crore invested in FY26. Large-cap funds, however, only attracted ₹4,863 crore, accounting for only about 20% of the ₹24,000 crore inflow in the previous financial year.

The surge in inflows this fiscal year has been stronger compared to the same period last year. Small-cap funds received 42% of their full-year FY25 inflow in the first four months, mid-cap funds received 36%, and large-cap funds attracted 33%. Since September, many small-cap companies have bolstered their balance sheets, reduced leverage, and improved debt-to-equity ratios, positioning them better to navigate business cycles.

Dinshaw Irani, CEO of Helios Capital Asset Management, attributes this trend to the superior earnings prospects of small-caps and mid-caps, particularly in sectors like IT and FMCG, which face earnings pressure in the large-cap universe.

Investors are displaying a greater appetite for risk, favoring small-cap and mid-cap stocks despite their higher risk. The BSE 250 SmallCap Index rose 6.8%, and the BSE 150 MidCap Index gained 9.4%, while the BSE Sensex fell by 4.4% and the BSE 100 Index remained flat. Experts attribute the increased interest in small caps to a combination of improving earnings, relatively attractive valuations, and robust domestic liquidity.

Small-cap funds also recorded the highest net inflows in July, attracting ₹7,767.5 crore, compared to ₹6,192.3 crore for mid-cap funds and a net outflow of ₹1,321.7 crore for large-cap funds.