Large-Cap and Flexi-Cap Funds Underperform as Mid-Cap Segment Sees 9% Growth in Three Months

Small-Cap Funds Reign Supreme Amid Market Rebound

Small-cap funds have emerged as the clear winners of the recent market, delivering average returns of 8.84 percent over the past three months. This marks a significant turnaround from the modest gains or negative territory seen in most diversified equity fund categories.

According to data, small-cap funds were the best-performing equity mutual fund category during the period, significantly ahead of mid-cap funds, which returned 3.83 percent, and multi-cap funds, which gained 2.43 percent. In contrast, large-cap funds lost 3.22 percent, while flexi-cap funds slipped 0.12 percent.

The trend is not limited to mutual funds. The underlying small-cap segment has also outperformed broader markets by a wide margin, suggesting the recent recovery has been led largely by smaller companies rather than blue-chip stocks. The Nifty Smallcap 250 TRI gained 8.84 percent over the past three months, closely mirroring the returns delivered by small-cap funds. Meanwhile, the Nifty Midcap 150 TRI rose 3.92 percent.

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Large-cap stocks, however, continued to lag. The Nifty 50 TRI declined 5.38 percent during the same period, highlighting the sharp divergence in performance across market-cap segments.

Over the past one year, small-cap funds delivered an average return of 2.32 percent, remaining in positive territory despite volatility in the broader market. Large-cap funds lost 1.59 percent over the period, while flexi-cap funds declined 0.54 percent and large & mid-cap funds slipped 0.08 percent. Mid-cap funds were the strongest performers over one year with returns of 4.42 percent, while multi-cap funds gained 1.41 percent.

The numbers suggest that returns have generally improved as investors moved down the market-cap spectrum. While large-cap funds struggled to generate positive returns, mid- and small-cap categories benefited from a much stronger recovery in the underlying segments.

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The recent rally comes amid a long-running debate over whether small caps adequately compensate investors for the additional risks involved. A recent CRISP Scorecard analysis comparing the Nifty Small Cap 250 TRI and the Nifty 100 TRI over the past 20 years found that small caps delivered an annualised return of 12.54 percent, compared with 11.72 percent for large caps. However, the higher returns came with significantly higher risk. The annualised volatility of the small-cap index stood at 28.81 percent versus 21.06 percent for the large-cap index. Small caps also experienced a deeper maximum drawdown of 75.56 percent compared with 61.08 percent for large caps.

The study further noted that small-cap outperformance has historically been cyclical rather than consistent, with periods of both strong outperformance and underperformance relative to large-cap stocks. For now, however, market leadership appears firmly tilted towards smaller companies.