September 2026 proved challenging for equity mutual funds across all categories, with mid-cap funds experiencing the steepest decline at 7.1%, followed by large-cap funds at 5.9%, flexi-cap at 5.8%, and small-cap funds showing relative resilience with a 3.1% decline. According to reports from Mint and ET Now, Value Research's September 2026 category averages confirmed that mid-cap funds fell 6.72%, large-cap at 5.83%, flexi-cap at 5.23%, and small-cap at 2.71%. However, all four categories recorded slightly smaller declines compared to their respective benchmarks during the month. The Nifty Midcap 100 dropped 7.62% to close September at 59,332.05, snapping a 5-month winning streak and marking the second biggest monthly fall since March 2026, when it slid 11%. The sharp correction was driven by multiple global and domestic factors creating headwinds for mid-cap stocks.
The longer-term performance data reveals a different investment landscape, with mid-cap funds leading across multiple time periods. Over a 3-year period, small-cap delivered the highest return at 14% annualised, followed by mid-cap at 13.7%, flexi-cap at 9.5%, and large-cap at 7.8%. As reported by Mint, the gap became more pronounced over five years, where mid-cap achieved 14.8% annualised returns, narrowly ahead of small-cap at 14.5%, flexi-cap at 9%, and large-cap at 7.1%. Over the 10-year period, mid-cap maintained its leadership with 16.6% annualised returns, followed by small-cap at 14.6%, flexi-cap at 12.8%, and large-cap at 11.7%. Recent fund-specific data from Mint shows Bank of India Mid Cap Fund leading with 17.13% 3-year CAGR, followed by Baroda BNP Paribas Mid Cap Fund at 14.02% and Canara Robeco Mid Cap Fund at 12.86%. Despite recent volatility, midcap stocks have risen 5% year-on-year over the trailing 12 months, outperforming Nifty 50's 8% decline over the same period, as per Motilal Oswal.
Recent market data reveals a significant valuation gap between large-cap and mid-cap segments, with large-cap funds delivering a category-average return of -4.76% over the past year, compared to 2.87% for mid-cap funds and 8.02% for small-cap funds. An October 2026 Netra report from DSP Mutual Fund highlights that small and mid-caps have outperformed the Sensex by 21.5% and 14.1% respectively over the past year, creating a polarised market environment. The report notes that large caps have corrected enough for valuations to be near fair/cheap zones, while small and mid-caps have seen less valuation compression and still need stronger earnings delivery to justify broad exposure. The Nifty 100's trailing P/E was 19.3 times at the end of September 2026, against a five-year median of 22.0 times, putting it about 12% below the five-year median. By comparison, the Nifty Midcap 150 was trading at 27.6 times earnings, while the Nifty Smallcap 250 was at 33 times earnings. DSP emphasizes that large caps may offer more opportunities at this time, with the report adding that large caps haven't been this attractive in over a decade.
The Nifty Midcap 100's 7.62% decline was led by significant drops in major constituents, with PB Fintech falling 43%, KEI Industries declining 22%, Godrej Properties dropping 19%, Havells India slipping 18%, and Suzlon Energy declining 17%. These declines reflect broader market pressures including global uncertainties, rising oil prices, and foreign investor outflows. The concentration of losses in these large-cap stocks within the mid-cap index contributed significantly to the overall decline, highlighting the volatility inherent in mid-cap investing despite their long-term outperformance. The sharp correction in these major mid-cap stocks demonstrates the concentration risk in the mid-cap segment during periods of market stress.
Despite small-cap indices significantly outperforming large caps over the past year, SIP investors should not change their strategy based on recent returns, according to experts. As reported by Mint, investors should continue their systematic investment plans while checking whether strong small-cap gains have pushed their portfolio beyond its intended allocation. Vaibhav Porwal from Dezerv advises investors to first assess their overall asset allocation rather than make decisions based on particular market segment performance. Bharath Rathore from Anand Rathi Wealth noted that midcaps were trading around 20% below their estimated fair value, while small caps were about 18% below it, suggesting valuation concerns across all market segments. Experts recommend that if mid- and small-cap allocation reaches around 25% of the overall portfolio, there is no need to change course simply because of recent market performance. However, DSP argues that investors should focus on margin of safety rather than relying on recent outperformance, with the report noting that during each downcycle, SMIDs lose almost all the alpha generated during the upcycle. The key distinction lies between continuing disciplined monthly investments and allowing portfolio drift away from intended allocation, with rebalancing warranted only when accumulated holdings exceed planned limits.
