Small-cap funds are sitting on ₹4.37 lakh crore. Why are fund managers holding on?

Mutual funds are holding on to their stakes in newly listed smaller companies for longer, with small-cap and mid-cap fund managers increasingly taking a patient approach to their IPO investments. Even after the mandatory lock-in period ends, many funds are choosing not to sell, particularly when they remain confident about a company’s growth prospects.

The trend comes as small-cap funds have seen a sharp rise in assets in recent years. Their assets under management (AUM) have grown at an annual rate of 42% over the past four years to ₹4.37 lakh crore. By comparison, large-cap funds have grown 17% annually during the same period to ₹4.13 lakh crore, according to a report by Business Standard.

The performance of the broader market has also favoured smaller companies. The Nifty 50 has delivered annualised growth of 8%, while the Nifty Smallcap 250 index has risen 19% annually over the same period.

A recent study by market regulator Sebi shows that domestic mutual funds have generally behaved as patient anchor investors in mainboard IPOs. Unlike foreign portfolio investors (FPIs), mutual funds have not rushed to exit their positions once the lock-in period ended.

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The Sebi study analysed around 242 IPOs launched between April 2022 and October 2025. Mutual funds sold an average of just 3% of their allotted shares after the 30-day lock-in period. Selling rose to 7% by the 60th day and 15% by the 90th day. In more than 100 IPOs, however, mutual funds did not sell any shares even after 30 days.

The longer holding period tells a similar story. Across 167 IPOs with a 365-day holding period, mutual funds sold only 38% of the value of their allocations, compared with 60% sold by FPIs.

For IPOs listed in 2025, mutual funds had sold just 15% of their allocations by the 90th day. The study found that funds continued to hold their investments, selling less than half of their allocations and rarely exiting large IPOs completely.

The approach is partly linked to the investment strategy followed by small-cap and mid-cap funds. Managers typically invest with a long-term view and may continue to hold a stock even after it has gained, provided they remain confident about its fundamentals.

Independent market analyst Ambareesh Baliga said mutual funds may have little incentive to sell a profitable position when they are sitting on excess cash and do not see better opportunities. “When mutual funds have more cash than good investment opportunities, there is little reason to sell profitable positions,” he said.

Baliga pointed out that FPIs have a wider pool of opportunities globally and may therefore have a different approach to IPO investments. “FPIs, however, have access to a wide range of opportunities across global markets and may therefore use IPOs to make quick gains,” he said.

He added that selling also creates the need to identify another investment for the money. “If a mutual fund sells a stock, it must find a better alternative in which to deploy the money,” Baliga said. “In such a situation, it is better to remain invested in stocks that are performing well.”

Gaurav Kulshreshtha, chief investment officer at NexAge Capital, said the trend should not necessarily be viewed as a result of a shortage of investment opportunities. “This is not about the availability of opportunities. They are making long-term bets in areas where they have the highest conviction,” he said.

“That is what small-cap and mid-cap fund managers are expected to do,” Kulshreshtha added. He also pointed out that these investments form only a limited part of the overall portfolios of the funds. “We must also remember that these companies account for only a small proportion of the funds’ overall portfolios.”

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A Business Standard analysis based on Prime Infobase data also showed that small-cap funds participating as anchor investors often remain invested for the long term in companies with strong fundamentals.

The latest market performance has further supported the resilience of smaller stocks. Over the past eight months, the Nifty Smallcap 250 index has gained 10%, while the Nifty 50 has declined 7%.

For fund managers, the strategy therefore appears to be less about exiting a stock simply because the lock-in period has ended and more about whether the original investment case still holds. If a newly listed company continues to meet their growth and fundamental expectations, selling the stake may not be the preferred option.