Small-cap mutual funds have emerged as the top-performing segment over the last one month, delivering double-digit returns of around 10%, significantly outperforming both mid and large caps. According to The Economic Times, 35 funds in the category have completed one month of existence, with Bank of India Small Cap Fund giving the highest return of around 15.11%, followed by Sundaram Small Cap Fund at 12.79% and LIC MF Small Cap Fund at 12.27%. However, experts caution this represents a sharp recovery following correction rather than a sustained rally, with Pallav Agarwal from Bhava Services LLP noting that the BSE Small cap 250 index fell nearly 25% from late 2024 to early 2026, making the recent rebound likely a short-term mean reversion rather than sustainable growth.
Despite domestic equity markets posting gains in early April, foreign institutional investors continued their selling spree with outflows of ₹19,150 crore from financial services stocks alone. According to exchange data, other sectors also witnessed significant selling pressure, with consumer services recording outflows of ₹5,336 crore and healthcare stocks seeing withdrawals of ₹4,481 crore in the first half of April. The auto sector witnessed FII outflows of ₹3,704 crore, while oil and gas stocks saw selling of ₹3,352 crore during the period. FMCG stocks recorded outflows of ₹2,976 crore, telecom stocks ₹2,492 crore, and realty companies ₹1,917 crore, indicating a continuation of the selling trend from March. However, domestic equity markets posted gains with BSE Sensex and Nifty 50 increasing by around 8.5% each for the time period, while BSE MidCap 150 increased 11% and BSE SmallCap 250 rose 13%.
According to The Economic Times, Aditya Khemani of Invesco Mutual Fund believes small and mid-cap valuations appear optically expensive compared to historical levels over the past 10 years. However, he argues that closer analysis reveals meaningful improvement in fundamentals that justifies this re-rating. The risk premium investors assign to these companies depends on several factors including balance sheet leverage, conversion of profits into operating cash flows, corporate governance standards, and overall financial discipline. Across these metrics, the SMID space has shown significant improvement compared to where it stood a decade ago. Tata Mutual Fund reports that the headline valuation premium for Nifty Smallcap 100 vs Nifty 50 has come down further to 12% by the end of March 2026 from the highs of nearly 21% in June 2025, though Nifty Smallcap 100 1-year forward P/E remained at 19.8, higher than the long-term average of 16.9x, indicating valuations continue to remain expensive.
As reported by The Economic Times, Khemani emphasizes that over the long term, the SMID space is expected to deliver mid-teens earnings growth. For investors with a minimum investment horizon of 5-7 years, the small-cap segment remains attractive despite current market conditions. Rajesh Minocha from Financial Radiance warns that investors should have a minimum investment horizon of five to seven years when allocating to the small-cap category, as small-cap stocks will experience short-term price swings, but their future performance remains strong only if one plans to stay invested for more than 10 years. Experts recommend disciplined SIP approach to navigate near-term volatility and caution against chasing short-term price movements. Pallav Agarwal notes that large caps look more attractive on risk-reward ratio as compared to small cap and even midcap category primarily because of reasonable valuations.
According to The Economic Times, Invesco is overweight in financials, consumer discretionary, and healthcare sectors. Within healthcare, the fund is overweight on services including hospitals and contract development and manufacturing companies. In consumer discretionary, the focus is on quick commerce, aviation, and retail themes. Within financials, the overweight position spans both lending entities such as banks and NBFCs, as well as non-lending segments including capital markets intermediaries, insurance companies, and related themes. The fund is also overweight on real estate, particularly companies with healthy mixes of residential real estate and annuity-based commercial portfolios. Sorbh Gupta from Bajaj Finserv AMC suggests that multi-asset strategies can act as effective shock absorbers amid geopolitical and commodity-driven uncertainty, while large-cap equities offer valuation comfort and relative stability in volatile conditions.
As reported by The Economic Times, Khemani notes that many of these companies are no longer truly 'small' in terms of market capitalisation or profit contribution, resulting in improved earnings resilience and reduced cyclicality compared to earlier periods. The fund sees contrarian opportunities in sectors like real estate and aviation that have faced short-term pressure due to factors such as high commodity prices and demand destruction. Rajesh Minocha emphasizes that market sentiment drives small-cap stock movements, creating patterns that are not evident in just one month of trading and investors should avoid chasing short-term 10% price changes. He recommends staggered investments through SIP or STP rather than investing a lumpsum, as attempting to time the perfect market dip often results in missed opportunities. Tata Mutual Fund suggests that for small cap exposure, a disciplined SIP approach is recommended to navigate near-term volatility.
