Apart from flexi-cap funds, both mid-cap and small-cap schemes continued to draw healthy inflows.
Mid-cap funds reported net inflows of ₹4,487 crore in November, up from ₹3,807 crore in October. Small-cap funds saw ₹4,407 crore flow in, compared with ₹3,476 crore in the previous month. Large-cap funds also registered higher interest, with inflows rising to ₹1,640 crore versus ₹972 crore in October.
Market participants note that despite a relatively subdued year for mid- and small-cap indices, long-term returns for these segments remain strong, supporting sustained investor appetite.
Valuations remain above long-term averages
The rise in flows comes at a time when valuations in the broader mid- and small-cap universe continue to trade above historical levels. As of October 2025:
- The BSE 250 Small Cap Index traded at a forward P/E of 26.2, about 48% above its 10-year average of 17.6.
- The NIFTY MidCap 100 Index stood at 28.8, nearly 29% higher than its long-term average of 22.3.
These elevated multiples suggest that investors are paying more for earnings relative to past cycles, even after a year of muted returns. Analysts caution that while improved corporate quality and broader participation partly explain the premium, valuation discipline becomes particularly important in categories known for sharper corrections during downturns.
Experts also point out that index-level valuations may not always reflect the valuation profile of actively managed schemes. Small-cap funds sometimes have only 10–15% overlap with their benchmark constituents, while mid-cap funds may have 30–40% overlap, resulting in portfolios that can differ materially in earnings quality, diversification and valuation levels.
Among the five largest mid-cap and small-cap schemes, publicly available data shows:
HDFC Mid-Cap Fund reported a portfolio P/E of 27.93 (compared with 34.1 for its benchmark) and a lower standard deviation of 13.86 (versus 15.76).
HDFC Small Cap Fund reported a portfolio P/E of 26.97 (versus 36.4 for the benchmark) and a standard deviation of 15.31 (vs 18.9).
Such differences highlight the range of approaches fund managers adopt in navigating valuation cycles.
Even with the recent moderation in category returns, longer-term performance remains robust for several schemes. For instance, HDFC Small Cap Fund has delivered 20.7% and 27% returns over the past three- and five-year periods, respectively, based on publicly available data.
Analysts note that mid- and small-cap segments typically move through alternating phases of acceleration and consolidation. Historically, these categories have generated higher long-term returns for investors comfortable with elevated risk and volatility.
