Midcap funds have posted 1.7% average returns in FY26, while largecap funds bled 3% and smallcaps dropped 2%, shows data from ACE MF.
“These results can primarily be attributed to how each segment reacted to the overall market movements,” says Sachin Jain, Managing Partner at Scripbox. “The level of volatility and the size of the corrections impacted the small-caps segment the most; the majority of the selling pressure was exerted on the large-caps segment. Conversely, mid-caps appeared to exhibit both growth and stability, affording them the opportunity to maintain their strength and perform well relative to each other.”
The midcap outperformance stems less from superior earnings and more from a fundamental shift in market flows. Foreign institutional investors, who maintain larger ownership positions in largecap stocks, have been relentless sellers with their exit creating disproportionate pressure on the Nifty’s heavyweight constituents.
Meanwhile, retail investor interest has flooded into midcaps, providing crucial support. “Mid-cap stock appreciation can be attributed to the movement of money into mid-caps through market flows as opposed to earnings alone,” Jain explains. “Liquidity, investor flows, and overall market participation are the primary components that drove mid-caps’ outperformance during the past several months.”
Smallcaps, despite their growth potential, suffered from their own structural weakness: lower liquidity created larger price fluctuations, amplifying volatility that spooked investors.
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Gurvinder Juneja, Principal Officer at Fortuna Asset, points to a more fundamental driver: actual business performance. “Midcaps have become the top market performers because they delivered better earnings results and demonstrated their ability to operate effectively,” Juneja notes. “Domestic manufacturing and specialty chemicals and financial services midcap businesses achieved steady double-digit profit growth throughout the entire year.”
While largecaps battled global economic headwinds and smallcaps struggled with capital shortages and shrinking profit margins, midcaps found themselves in a Goldilocks zone—exposed enough to India’s domestic growth story to capture upside, yet governed well enough to attract institutional money.
Critically, midcaps underwent a valuation reset that made their risk-return profile attractive. “Midcap stocks experienced a needed market adjustment after their initial price surge because this made their risk-return balance attractive to institutional investors,” Juneja says.
The barbell strategy for investors
With the Nifty50 essentially flat over the past 18 months, largecaps have had time to correct toward more reasonable long-term valuations. That’s creating a strategic dilemma for investors: chase midcap momentum or rotate into cheaper largecaps?
Juneja advocates what he calls a barbell approach of maintaining exposure to fast-growing midcaps while increasing allocation to high-quality largecaps that offer stability amid global trade tensions and geopolitical uncertainty.
“The Nifty has been steady for a time and this has made big companies a good option because they are safe and might become more valuable,” Juneja argues. “Big companies are like a place to put our money and they might even get more valuable, over time.”
Can midcaps sustain the lead?
The sustainability question looms large. Jain cautions against chasing recent performance, emphasizing that investment decisions should stem from asset allocation strategy and risk tolerance, not short-term returns.
“A diversified portfolio with all three categories will give investors an opportunity to diversify their risk while attempting to achieve more consistent long-term returns instead of chasing temporary out-performance through one segment,” he says.
Juneja sees continued strength in midcaps but acknowledges largecaps are becoming compelling. “The momentum of midcap companies is still going strong. Big companies or large caps are also becoming compelling choices at the right price,” he notes.
The investment framework is straightforward: largecaps offer stability with less price movement and better risk-adjusted returns; midcaps provide higher growth potential at moderately increased risk; smallcaps carry the highest risk due to price volatility.
(Data inputs from Surbhi Khanna)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)