Small & Midcap funds: Inflows in smallcap MFs jump to Rs 5,720.87 cr, midcap funds to Rs 5,147.87 cr; should you stay invested?

Amidst corrections in the broader markets, there has been a consistent increase in net flows into small-cap equity mutual funds over the past six months. According to data from the Association of Mutual Funds in India (AMFI), in January 2025, the net flow into small-cap funds amounted to Rs 5,720.87 crore, higher than the Rs 4,667.70 crore recorded in December 2024. Meanwhile, midcap funds saw an inflow of Rs 5,147.87 crore during the same period.

The net flows into small-cap funds have shown significant growth, rising by over 78% from Rs 3,209.33 crore in August 2024 to Rs 5,720.87 crore in January 2025. Additionally, there was a 23% increase in net flows into small-cap funds between December 2024 and January 2025. It is worth noting that during this period, small-cap fund flows increased despite a decline in net flows into equity-oriented mutual funds, which dropped from Rs 41,156 crore in December to Rs 39,688 crore in January.

In January, equity mutual funds remained relatively stable at Rs 39,687.78 crore, experiencing a slight decrease of 3.6 percent compared to the previous month, despite facing strong selling pressure in the markets. However, there was a significant increase in net investment in largecap funds, which surged by 52.3 percent to reach Rs 3,063.33 crore, marking the second-highest level of investment in this category.

Due to a continuous decline in equities, the majority of smallcap funds have been experiencing negative returns on their one-year Systematic Investment Plans (SIPs) for the past six months. This trend has raised concerns among investors, who have invested around Rs 35,000 crore into active smallcap funds in 2024, which is almost twice the amount flowing into largecap funds.

“Almost 40k crore of inflows for month of Jan 25 where we have seen broader indices corrected more than 12% from its peak. There was a slight dip of 3.6% in inflows compared to December 2024, but we’re still seeing positive flows for the 47th month in a row. This small drop came after a pullback in both the NSE and BSE indices. However, the markets experienced intermittent bouts of volatility, driven by sluggish economic growth, rising protectionist tendencies, and geopolitical uncertainties. These factors contributed to market jitters over the past few months. Despite these hurdles, the steadfast commitment of domestic investors through SIPs underscored a deeper confidence in the long-term potential of the Indian economy,” said Viraj Gandhi, CEO of Samco Mutual Fund.

He added: “This resilience not only cushioned the impact of external shocks but also painted a promising picture of the future, where domestic participation is seen strengthening the foundation of India’s financial markets. Small cap index corrected by more than 13% from its peak but there is no slowdown in inflows from this segment. To everybody’s surprise, January 25 saw a record inflow of Rs 5721 crores a stellar growth of 23% QoQ and 75% YoY in a correcting phase.”

The Nifty 50 index saw a decline from its peak of 24,347 points on August 12, 2024, to 23,508 points on January 31, 2025. As of February 12, 2025, the index was trading at 23,065 points. Similarly, the BSE Sensex dropped by approximately 3%, going from 79,648 points on August 12, 2024, to 77,500 on January 31, 2025.
According to data from the National Stock Exchange (NSE), the Nifty Small Cap 250 index, commonly used as a benchmark by small-cap funds, experienced a decrease of around 9%, falling from 17,392 points on August 12, 2024, to 15,851 points on January 31, 2025.

Multiple experts have cautioned about the potential bubble forming in higher-risk market segments. S Naren, Chief Investment Officer of ICICI Prudential Mutual Fund, emphasized the need for caution when considering SIP investments in mid and small-cap stocks. As a result, several experts have shared their own advice on the matter.

Radhika Gupta, the CEO of Edelweiss Mutual Fund, emphasized the importance of not succumbing to fear-mongering or getting caught up in short-lived debates. In a recent post on X and LinkedIn, she highlighted that SIPs are meant to be straightforward, long-term savings tools for the everyday investor. Gupta recommended that investors focus on selecting a reputable manager and adopt a sensible approach to holding investments for the long haul, rather than being swayed by temporary market fluctuations.

Mahesh Patil, CIO of Aditya Birla Sun Life AMC, said: “There will be ups and downs, but if you stay invested and keep putting in, it can give you long-term income, growth, and savings,” he said at an event. While he said that SIP growth may slow due to evolving market conditions, SIPs will remain a critical component of the Indian investment activity.”