Why long-term investors can’t ignore mid and small-cap funds anymore - expert explains

Indian equity mutual fund investors have increasingly recognised the significance of mid and smallcap funds in their portfolios, as recent data demonstrates these categories' consistent outperformance relative to large cap funds. Mid- and small-cap funds continue to play a vital role in long-term wealth creation, says Rushabh Desai, Founder of Rupee With Rushabh Investment Services, citing a decade of data that shows their superior performance and resilience across market cycles.

Desai points to a detailed analysis of index and active fund returns between April 2015 and December 2025, which highlights how mid- and small-cap strategies have consistently delivered stronger outcomes than large-cap investments. “The numbers clearly reaffirm why these segments are indispensable for investors seeking long-term growth,” he says.

A comparative study of key indices — Nifty 100 TRI, Nifty Midcap 150 TRI and Nifty Smallcap TRI — on a 10-year daily rolling CAGR basis reveals that mid- and small-cap indices generated returns above 15% for 60% and 44% of the period, respectively, compared with just 14% for large caps. Even more telling, Desai notes, is that mid- and small-cap indices outperformed large caps 98% and 69% of the time, underscoring the structural growth advantage embedded in these segments.

The story becomes even stronger when active fund performance is added to the mix. Between April 2015 and December 2025, active mid-cap and small-cap funds delivered 15% CAGR returns 60% and 64% of the time, respectively, while large-cap active funds achieved similar returns only 10% of the time. More strikingly, active mid-cap and small-cap funds outperformed active large-cap funds in 100% and 97% of periods, reinforcing their role as powerful alpha generators, Desai says.

According to him, this consistent outperformance stems from the nature of India’s economic evolution. “Large caps offer stability, but mid- and small-cap companies capture the real momentum of change,” Desai explains. These firms are often at the forefront of emerging sectors such as manufacturing, financial inclusion, digital services and niche consumption, enabling them to grow earnings at a faster pace during economic upcycles.

Recent corporate performance trends support this view. Desai points out that profit growth among mid- and small-cap companies has outpaced that of large caps in recent quarters, reflecting a healthy earnings cycle and a broadening of growth beyond a handful of blue-chip names. This expanding opportunity set, he says, gives fund managers greater scope to identify quality businesses early in their growth phase.

That said, Desai cautions investors against underestimating the volatility inherent in these segments. Mid- and small-cap stocks are more sensitive to market cycles and can experience sharper corrections. “These categories are not meant for short-term speculation. They demand patience and discipline,” he says. For most investors, he recommends balancing portfolios with meaningful exposure to large caps for stability, while allocating 25–50% of equity investments to mid- and small-cap funds based on individual risk tolerance.

Another reason Desai believes these funds are indispensable is their ability to beat real inflation. While headline inflation may appear contained, the actual cost of essentials such as healthcare, education and lifestyle services often rises much faster. “To protect purchasing power over time, investors need growth assets — and mid- and small-caps are best placed to deliver that,” he says.

Looking ahead, Desai remains optimistic about the long-term prospects of the segment. India’s strong GDP trajectory, rising formalisation and expanding digital economy continue to create fertile ground for emerging businesses. With disciplined investing through SIPs or staggered allocations during market corrections, he believes investors can harness volatility to their advantage.

“Markets will always move in cycles,” Desai says, “but history shows that for those willing to stay invested for eight to ten years, mid- and small-cap funds remain among the most effective tools for building long-term wealth.”