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

ET Intelligence Group: Investors are favouring small-cap and mid-cap stocks over their large-cap counterparts amid improving earnings momentum and higher market liquidity. This is visible from the trend in inflows in the current fiscal year. Investors have pumped nearly ₹25,200 crore into small-cap funds in the first four months of FY27, almost half of nearly ₹51,000 crore invested during the entire FY26.This is also the highest amount invested in small-cap funds during the first four months of any financial year so far. Mid-cap funds garnered ₹23,218 crore, nearly 44% of the ₹52,800 crore invested in FY26. In contrast, large-cap funds attracted just ₹4,863 crore during the period, only about 20% of the ₹24,000 crore inflow in the previous financial year.The pace of inflows has been stronger this fiscal year compared with FY26. In the first four months of the past year, small-cap funds attracted 42% of their full-year FY25 inflow compared with 36% for mid-cap funds and 33% for large-cap funds. In FY26, small-cap funds attracted ₹17,723 crore in the first four months, mid-cap funds received ₹15,059 crore while large-cap funds collected ₹7,741 crore.133305959"Since September, many small-cap companies have strengthened balance sheets, reduced leverage and improved debt-to-equity ratios, making them better positioned to withstand business cycles," Dinshaw Irani, CEO, Helios Capital Asset Management, told ET. He added that the large-cap universe includes several sectors facing earnings pressure, particularly IT and FMCG. This divergence in earnings prospects is making small-caps and mid-caps relatively more attractive to investors, despite their higher inherent risk.Small-cap and mid-caps stocks tend to be more volatile and therefore riskier than large caps, implying that investors are showing greater appetite for risk. The rise in inflows into mid-cap and small-cap funds mirrors the strong performance of small- and mid-cap stocks over the past 12 months.The BSE 250 SmallCap Index rose 6.8% while the BSE 150 MidCap Index gained 9.4%. The BSE Sensex, on the other hand, fell by 4.4% during the period whereas the BSE 100 Index remained flat. Experts attribute the increased appetite for small caps to a combination of improving earnings, relatively attractive valuations and strong domestic liquidity.Small-cap funds also recorded the highest net inflows among the three categories in July. They attracted ₹7,767.5 crore, compared with ₹6,192.3 crore for mid-cap funds, while large-cap funds saw a net outflow of ₹1,321.7 crore.