Mid- and small-cap funds: Hold tight, stay the course

Market swings can be nerve-wracking. But volatility is the price of high returns. Mid- and small-cap stocks, known for their high growth potential, also come with dramatic ups and downs. After a roaring run in 2023 and 2024, 2025 has delivered a stark reality check. Since the peak in September 2024, the Sensex has slipped 15 per cent, while mid-caps have tumbled 21 per cent and small-caps have nosedived 25 per cent. These funds are at best meant for a supplementary allocation in your portfolio precisely for their high risk avatar. However, history suggests that staying invested through downturns can be highly rewarding. Keep your SIPs running and stick to your asset allocation. Category snapshot Parameters Mid cap Small cap Number of actively managed funds 30 30 Assets Rs 3.73 lakh crore Rs 3.06 lakh crore Asset-weighted expense 0.7 0.68 Average expenses - Index funds 0.28 0.36 Asset-weighted category returns for 2025 -16.80% -19.75% Average return of top quartile funds -15.08% -17.86% Average return of bottom quartile funds -19.68% -24.34% Average large-cap exposure 13.52% 9.82% Average mid-cap exposure 70.83% 13.62% Average small-cap exposure 16.80% 79.83% Three most popular funds Motilal, HDFC, Kotak Nippon, SBI, Quant Three least popular funds LIC, Franklin, Taurus Sundaram, PGIM, Baroda Note: Returns are YTD as of February 28, 2025. Expense and portfolio-level attributes are as of Jan 31, 2025. Popular funds based on net flows as of February 2025. Key trends Performance: After two blockbuster years, mid- and small-cap funds have hit turbulence in 2025. Small caps, which lead rallies, also fall the hardest—a cycle playing out yet again. This boom-and-bust pattern is part and parcel of investing in these segments, where excess optimism often leads to corrections. Fund managers still hold an edge: Passive investing continues to gain traction—50 per cent of mid-cap funds and 35 per cent of small-cap funds now follow passive strategies. However, active funds have proven their worth, especially in small caps, where skilled fund managers can sidestep weak businesses. Since the 15 per cent market correction in late September 2024, 22 of 29 active mid-cap funds and all 28 active small-cap funds with a relevant track record have outperformed their benchmarks—showing that active management still adds value in volatile markets. No panic selling: Despite falling prices, investors haven't rushed for the exit. On the contrary, net inflows have actually risen since September, signaling strong conviction and disciplined investing. This kind of patience has historically been rewarded over time. Where are funds investing? Sectoral allocations are shifting. Healthcare exposure has increased, while capital goods exposure has slightly reduced but remains a key sector alongside financials, when reviewed over the last six months (as of January 2025). New entrants in the space: The segment continues to attract new players. Mirae and Trust have launched small-cap funds, while Helios has introduced a mid-cap fund. Changes in recommendation Funds moved to 'Buy': HDFC Mid-Cap Opportunities, Bandhan Small Cap Fund moved to 'Hold': Franklin India Prima, ICICI Pru Midcap, Mirae Asset Midcap, Franklin India Smaller Companies, LIC MF Small Cap Funds moved to 'Sell': DSP Midcap, PGIM India Small Cap, DSP Nifty Midcap 150 Quality 50 ETF, Edelweiss Nifty Midcap150 Momentum 50 Index, SBI Nifty Midcap 150 Index, Tata Nifty Midcap 150 Momentum 50 Index, UTI Nifty Midcap 150 Quality 50 Index, Funds moved to 'Avoidable': Bandhan Nifty Smallcap 250 Index, Groww Nifty Smallcap 250 Index Funds at a glance Fund name Rating Assets (Rs cr) 3Y SIP return (%) 5Y SIP return (%) Risk Grade Expense ratio (%) Large cap exposure (%) Mid-cap funds Aditya Birla Sun Life Mid Cap Fund 2 5,533 13.17 18.87 Above Average 1.14 9.60 Axis Midcap Fund 2 28,380 13.61 17.29 Average 0.57 19.02 Baroda BNP Paribas Midcap Fund 3 2,046 15.25 20.41 Below Average 0.56 9.15 DSP Midcap Fund 1 17,762 11.43 14.49 Above Average 0.77 12.73 Edelweiss Mid Cap Fund 4 8,268 20.24 24.95 Below Average 0.41 10.94 Franklin India Prima Fund 3 11,656 17.83 20.48 Average 1.02 13.96 HDFC Mid-Cap Opportunities Fund 5 73,510 19.14 24.62 Below Average 0.83 6.39 HSBC Midcap Fund 3 10,753 15.71 19.16 Below Average 0.70 20.21 ICICI Prudential Midcap Fund 2 5,975 14.79 20.44 Above Average 1.17 16.75 Invesco India Mid Cap Fund 4 5,645 21.02 23.49 Average 0.65 12.82 ITI Mid Cap Fund 4 1,095 18.11 -- Average 0.17 8.88 Kotak Emerging Equity Fund 4 49,092 14.60 21.07 Below Average 0.45