Fund managers expect a revival in small-cap mutual funds for FY27 as valuations stabilize and earnings improve. Recent data shows the Nifty Smallcap 250 index outperforming broader benchmarks, though experts advise a selective focus on companies with strong fundamentals to manage ongoing volatility.
Small-cap mutual funds are seeing renewed optimism among fund managers for the 2027 fiscal year. After a period of valuation cooling that lasted throughout much of the previous year, the segment is now viewed as having more attractive entry points for investors. This sentiment is supported by the performance of the Nifty Smallcap 250 index, which has gained approximately 15% over the last six months, outpacing the growth of the benchmark Nifty 50.
Earnings Recovery as a Catalyst
The previous two years were marked by moderated earnings and macroeconomic challenges, which dampened performance in the small-cap space leading up to March 2026. However, signs of earnings stabilization since the latter half of the last fiscal year have helped improve sentiment. As global uncertainties ease, fund managers expect this bottom-up recovery to translate into better corporate results for smaller firms in FY27. For instance, Mirae Asset Mutual Fund's small-cap scheme has reached over ₹5,000 crore in assets under management, reflecting sustained investor appetite despite the volatility seen in the broader market.
Strategic Focus on Quality
While the outlook is improving, market experts emphasize that a selective approach is necessary. Volatility remains a common characteristic of the small-cap segment, and minor price corrections are still possible. Professional investors are prioritizing companies that demonstrate consistent earnings, scalable business models, and the ability to maintain pricing power even in a competitive environment. This strategy involves shifting focus away from speculative bets toward businesses with proven operational track records.
Key Sectors to Track
Fund managers are identifying specific themes that are likely to benefit from the expected earnings cycle in FY27. Capital goods, particularly companies involved in power transmission, renewable energy, and data center infrastructure, are seeing increased interest due to consistent demand. Additionally, the financial services sector—specifically brokerages and asset managers that benefit from the rising trend of financial savings in India—remains a preferred area. Healthcare, including hospital chains and diagnostic providers, is also being closely watched for its stable, non-cyclical demand profile. Investors looking at this segment may monitor quarterly earnings reports for signs of margin expansion and the actual realization of order books in the manufacturing-heavy sectors to gauge whether the projected revival is translating into bottom-line growth.