Inflows Surge Despite
In 2025, amid a backdrop of volatile market conditions, mid-cap and small-cap mutual fund schemes in India attracted a remarkable influx of investments.
This influx defied the muted returns experienced by these schemes. Overall equity inflows for the year totaled Rs 3.51 lakh crore, which represents an 11.19 percent decrease from the Rs 3.94 lakh crore recorded in 2024. However, it still significantly surpassed the Rs 1.62 lakh crore observed in 2023. These figures highlight a dynamic investment environment. Investors showed a distinct preference for mid-cap and small-cap funds over their large-cap counterparts. Domestic investors emerged as the primary source of net inflows for the last two years, reflecting a strong conviction in these segments. Foreign investors, conversely, largely avoided these areas. They maintained selling positions in large-cap stocks, indirectly channeling domestic funds into mid- and small-cap schemes.
Investor Averaging Behavior
Investors consistently exhibited a strategy of averaging their investments during market corrections, as indicated by consistent SIP inflows into mid-cap and small-cap schemes. This behavior underscores the belief in the long-term potential of these investments. The prevailing sentiment among investors involves maintaining a three-to-four-year investment horizon. This sustained confidence is further bolstered by the less attractive returns offered by assets such as gold and silver, especially when considering long-term allocation strategies. The absence of significant outflows, despite roughly 16 months of limited returns, illustrates the sustained conviction of investors. This is supported by the fact that even poorly performing mid- and small-cap funds fared better than many individual stock portfolios. Independent analyst Ambreesh Baliga noted that numerous individual portfolios experienced losses of 20 to 30 percent or more, whereas even the worst-performing mid- and small-cap funds were down by approximately 5 to 6 percent as of the end of December.
Market Performance Variations
The performance of the market remained mixed throughout the year. The BSE MidCap index saw a modest gain of just 1.1 percent in 2025, while the BSE SmallCap index faced a decline of 6.6 percent. Conversely, the Sensex and Nifty indices experienced more positive growth, advancing by nearly 9 percent and 10.5 percent, respectively. This performance disparity reveals varied investor outcomes within different market segments. Baliga added that investor interest usually remains intact as long as losses stay contained. However, when declines deepen, averaging slows, secondary market liquidity dries up, selling pressure intensifies, and stocks can fall further, sometimes triggering margin calls. These factors collectively indicate the complexities and risks inherent in the market dynamics. They emphasize the importance of understanding the varying performance metrics of different market sectors.
