Why are investors chasing both small-cap funds and gold ETFs?
For a long time, gold and small-cap stocks were seen as opposite choices. One was the safe haven. The other was the aggressive bet. But mutual fund flows in August tell a different story. Investors put nearly Rs 15,000 crore into small and mid-cap funds while also pouring more money into gold ETFs, according to data released by the Association of Mutual Funds in India (AMFI) on September 10.
The message may not be that investors have suddenly become more aggressive. It could be that they are becoming more comfortable taking risk while keeping a hedge alongside it.
Data shows small-cap funds received Rs 7,973 crore in August, up from Rs 7,768 crore in July. Mid-cap funds added another Rs 6,989 crore, compared with Rs 6,192 crore a month earlier. Together, the two categories attracted Rs 14,962 crore in August. That was about Rs 1,000 crore more than the Rs 13,960 crore they received in July.
This happened even as gold saw a sharp increase in investor interest.
Gold ETFs received Rs 2,597 crore in August. That was significantly higher than the Rs 1,559 crore they received in July. Gold ETF assets also rose 10.3% in August to Rs 1.91 lakh crore from Rs 1.73 lakh crore in July. Over the past year, gold ETF AUM has jumped 163.7%. AMFI says the sharp rise in AUM over the year was largely driven by rising gold prices.
So what is going on?
Investors are not necessarily choosing between risk and safety
Rajesh Singla, CEO and Fund Manager at Alpha AMC & Planify, sees the August numbers as a sign of changing investor behaviour. “The August flows tell a story of maturing conviction, not just appetite.”
Investors putting money into small and mid-caps while also buying gold and silver ETFs is not necessarily contradictory, he says. They could be trying to stay invested in growth while also protecting the portfolio from volatility.
“They’re staying invested in growth while hedging against volatility, rather than picking one over the other,” Singla says.
The broader mutual fund numbers support this argument.
Equity funds received Rs 29,329 crore in August. This was the 66th consecutive month of positive inflows and was higher than the Rs 24,697 crore received in July. Small-cap funds were the biggest contributors within equity funds, followed by mid-cap funds.
At the same time, investors were not simply putting all their money into the riskiest parts of the market.
Multi-asset allocation funds received Rs 3,671 crore in August. Arbitrage funds received another Rs 3,789 crore. Together, they accounted for around 74% of the total inflow into hybrid funds. Multi-asset funds also marked their 60th consecutive month of positive flows.
That is important because multi-asset funds are designed to spread money across different asset classes. The flows suggest that diversification remains an important part of the way investors are approaching the market.
Small-cap flows are still strong, but there is a catch
The continued flow into small caps is perhaps the clearest sign that investors remain willing to take equity risk.
Small-cap funds have now attracted Rs 7,973 crore in a single month. Their AUM stood at Rs 4.66 lakh crore at the end of August, up from Rs 4.41 lakh crore in July. Mid-cap fund AUM also increased from Rs 5.23 lakh crore to Rs 5.43 lakh crore.
But strong flows do not automatically mean that investors are blindly chasing returns.
Singla believes a large part of the small-cap flow reflects long-term conviction, particularly because of SIP-driven investing. Such investors may continue investing even when valuations or short-term market movements change. “At the same time, some portion is undoubtedly return-chasing,” he says.
That distinction matters. Small caps can be volatile, and strong past performance can attract investors when valuations are already elevated. The fact that money continues to flow into the segment should therefore not be read as a signal that valuations no longer matter.
For investors, the more important question is whether the money is being invested as part of a long-term allocation or because a particular segment has recently performed well.
Small caps and mid-caps have delivered steady returns, while gold has surged
The return data also shows why these categories may be attracting investor interest. Small-cap and mid-cap funds have delivered strong annualised returns over three and five years, while gold has delivered particularly high returns over the past one, three and five years.
| Category | 1 Year | 3 Years | 5 Years |
| Small-cap funds | 11.55% | 14.84% | 15.71% |
| Mid-cap funds | 7.23% | 14.46% | 14.90% |
| Gold | 42.79% | 36.51% | 25.70% |
(Source: Value Research)
Gold is becoming a portfolio asset
The gold numbers show another important change. Gold ETF inflows rose by nearly two-thirds from July to August. Gold ETFs received Rs 2,597 crore in August compared with Rs 1,559 crore in July. Silver ETFs also received Rs 1,271 crore during August.
Gold ETF AUM has now reached ₹1.91 lakh crore. It was Rs 1.73 lakh crore in July. The category’s AUM is up 163.7% from a year earlier.
But here too, the rise in AUM needs to be read carefully. The sharp annual increase is not entirely because investors have put in that much fresh money. Rising gold prices have also pushed up the value of existing holdings. AMFI specifically attributes much of the annual AUM increase to rising gold prices.
Singla believes the bigger story is the way investors are using gold. “Indian investors have moved past treating gold purely as jewellery or a crisis hedge. It’s now a deliberate, allocated portfolio asset,” he says.
That is perhaps the most interesting takeaway from the August data. Gold is no longer necessarily being bought only when investors are scared. It can sit alongside equities in the same portfolio.
The debt numbers also offer an important clue
If investors were becoming broadly more aggressive, we would expect money to move away from safer assets across the board. The August data does not show such a simple shift.
Debt-oriented funds saw a net outflow of Rs 8,127 crore in August after receiving a massive Rs 1.88 lakh crore in July. But the flow within debt funds was mixed. Liquid funds received Rs 19,934 crore and money market funds received Rs 11,735 crore. Overnight funds, on the other hand, saw an outflow of Rs 30,654 crore. Longer-duration categories also saw outflows.
So it would be too simplistic to say investors have abandoned safer assets and moved entirely into riskier ones.
There is also evidence of continued diversification. Passive fund AUM rose 1.8% in August to Rs 15.42 lakh crore. Gold and silver ETFs were the biggest movers, with their AUM rising 10.3% and 10.1%, respectively.
So, are investors becoming more aggressive?
The August numbers suggest that investors are comfortable with risk. But they do not necessarily suggest reckless risk-taking.
The stronger small-cap and mid-cap flows show that investors still have faith in equities and are willing to participate in segments that can be volatile. At the same time, the rise in gold, silver and multi-asset allocations suggests that many investors are not making a simple all-in bet on equities.
The better description may be risk-taking with a hedge. The change is also visible in the size of the mutual fund industry. Overall MF AUM rose 1.5% in August to Rs 87.08 lakh crore from Rs 85.76 lakh crore in July. Equity AUM rose 2.2% to Rs 39.21 lakh crore, while hybrid AUM increased 1.6% to Rs 11.86 lakh crore.
SIP assets also rose 2.3% to Rs 18.62 lakh crore and accounted for 21.4% of total mutual fund assets. That makes the current picture more nuanced.
Investors are not necessarily saying that small caps are safe. They are saying they are willing to own them for the long term. And they are increasingly comfortable holding gold at the same time.
The real shift, therefore, may not be in how much risk investors are willing to take. It may be in how they are managing that risk.
In August, investors did not choose small caps or gold. They chose small caps and gold. That is less a story of blind aggression and more a sign that diversification is becoming a bigger part of the Indian investor’s playbook.
Disclaimer: Mutual fund investments are subject to market risks. The data and analysis in this story are based on AMFI data and category-level return data and are intended for informational purposes only. Past returns and fund flows do not indicate future performance. Investors should consider their financial goals, risk appetite and investment horizon before making investment decisions.
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