Retail investors poured ₹9,331 crore into mid- and small-cap mutual funds in May 2026, accounting for 41% of total equity inflows. While these segments offer high-growth potential, experts warn that excessive allocation can increase portfolio risk due to lower liquidity and higher volatility compared to large-cap stocks.
Retail investors have shown a strong preference for mid- and small-cap mutual funds in recent months. Despite a cooling in overall equity mutual fund investments to ₹22,908 crore in May 2026, the mid- and small-cap categories remained favorites, attracting a combined ₹9,331 crore. Of this, small-cap funds brought in ₹4,946 crore, while mid-cap funds added ₹4,385 crore. This momentum extended into June, with total equity inflows reaching ₹28,973 crore and mid-cap funds specifically securing ₹6,090 crore.
Asset Growth and Market Appetite
The popularity of these funds is clearly reflected in their rising assets under management. By May 2026, the total assets held by small-cap funds reached ₹4.04 lakh crore, a 20.3% increase compared to the previous year. Mid-cap funds saw similar growth, with assets reaching ₹4.88 lakh crore, up 19.5% year-on-year. Over the last three years, the combined assets in these segments have more than doubled, driven by both new investments and the underlying rise in the stock prices of the companies these funds hold.
Risks of Higher Allocation
While these funds are often sought for their potential to outperform larger companies, they carry distinct risks. Smaller companies are generally more sensitive to market downturns and often face lower liquidity, meaning it can be harder for fund managers to sell shares quickly during a market correction without impacting the price. If these segments make up a dominant portion of an investment portfolio, investors may face significant drawdowns if market sentiment changes.
Financial experts suggest that mid- and small-cap exposure should be balanced with large-cap holdings to manage overall risk. Many retail investors may already have indirect exposure to these smaller companies through flexi-cap or multi-cap funds without realizing it. A review of one's total portfolio is often recommended to understand the real level of exposure to these higher-risk segments. If the combined mid- and small-cap weight exceeds 30-35% of an equity portfolio, adding more funds might increase the concentration risk unnecessarily.
Monitoring Fund Performance
When choosing where to invest, experts advise looking past short-term returns. A fund's ability to protect capital during market corrections and its process for managing liquidity are often more important for long-term success. Investors may track the fund's investment strategy, how well it diversifies holdings, and its historical performance during periods of market stress to ensure it fits their risk tolerance.