Excerpts:
Q. How do large, mid and small caps differ in terms of market cap ranking, growth potential, and risk?
Chirag Muni: Large-caps are established, stable companies that deliver consistent growth. They’re less risky, highly liquid, and form the core of most portfolios.
Mid-caps are slightly more volatile than large-caps, but still relatively stable, offering a balance of growth and stability.Small-caps carry the highest growth potential but also the most volatility.That’s why diversification across all three segments is crucial. If you stick only to large-caps, you compromise on returns. If you focus only on small-caps, you take on excessive risk. A prudent portfolio must have exposure to all three categories.
As per SEBI’s definition:Top 100 companies by market cap = Large-cap101 to 250 = Mid-capBeyond 250 = Small-capQ. Over the past 3–5 years, how have mid-cap and small-cap funds performed compared to large-caps?
Chirag: Large-cap funds delivered about 13.9–14% CAGR over the last three years. In comparison, mid- and small-cap funds have returned around 20–21%, clearly outperforming.
Index performance mirrors this trend:Nifty 50: ~11%Mid- & Small-cap indices: ~20–22%
Q. What do fund flows and AUM trends suggest about investor interest in mid- and small-cap funds?
Chirag: Retail investors have become more mature. Around 12–13% of overall equity fund inflows are going into mid- and small-cap categories, indicating investors are willing to handle volatility for long-term gains.
In July:Mid-cap funds: ₹8,700 cr gross inflow; ₹5,182 cr net inflowSmall-cap funds: ₹9,776 cr gross inflow; ₹6,484 cr net inflowIn terms of AUM:Mid-cap: ₹4.28 lakh crSmall-cap: ₹3.55 lakh crTogether, they form 10–15% of total equity AUM—a sign of growing maturity among investors.
Q. Investors often see mid- and small-caps as too risky. Do beta levels support this perception?
Chirag: Not really. The one-year beta for:
Nifty Midcap 150: 1.07Nifty Smallcap 250: 1.1Yes, slightly higher than Nifty 50’s beta of 1. But if you take a longer-term view, the beta actually falls below 1, about 0.94 for mid-caps and 0.92 for small-caps.
So, over the long run, they’re not more volatile than large-caps, provided investors stay invested for at least 4–5 years.
Q. What’s the earnings growth outlook for FY26–27 across market caps?
Chirag: India’s macro backdrop looks strong, steady GDP growth, low interest rates, manageable inflation, and fiscal discipline.
Earnings estimates for the next 2–3 years:Large-caps (Nifty 50): 10–11% CAGRMid- & Small-caps: 12–15% CAGRQ1 FY26 results also reflect this:Nifty 50 earnings: up 8.3%Midcap 150: ~15%Smallcap: lagging at ~2–2.5%, but with potential upside
Q. Are mid- and small-cap indices overvalued right now?
Chirag: Midcaps are slightly undervalued.
Current index ~21,000 vs. fair value ~21,700–21,800.Smallcaps are fairly valued, with the Smallcap 250 at ~16,700–16,800, in line with forward earnings.
Nifty itself is undervalued by 5–6%, suggesting healthy room for upside.
Q. SIP investors often panic if their first-year returns are negative. What do historical trends suggest?
Chirag: Patience is key. Our study shows:
If small-caps delivered -20% in year 1, 5-year IRR averaged 17.5%.If year 1 was flat (0–7%), 5-year returns averaged 16.5%.If year 1 gave 7–20%, the 5-year average was 13.5–14%.So, the longer you stay, the more likely you are to earn 13–15% annualized returns. First-year negatives should not deter investors.
Q. What’s the ideal allocation across large, mid, and small-caps considering the current market scene?
Chirag: A balanced allocation is key:
Large-cap: 50–55% (stability)Mid-cap: 20–25%Small-cap: 20–25%Review your portfolio quarterly or half-yearly to avoid over- or under-allocation.
Q. What’s your advice for investors entering the market now?
Chirag: This is a good time to enter, though not necessarily the best. India’s macro story remains intact, with nominal GDP growth of 10–11%, translating into earnings growth.
Yes, short-term volatility will remain due to tariffs, global risks, and FII activity. But domestic liquidity (₹30,000 cr monthly SIP inflows) provides a strong cushion.
For investors with a 3–5 year horizon, the outlook is very positive. Short-term corrections are possible, but long-term prospects are intact.
Disclaimer: Please note that these are not recommendations. Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
