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Summary: Choosing between mid-cap and small-cap funds isn’t easy. In this story, we break down how these two categories stack up—not just in returns, but also in how they react to market crashes and how quickly they recover. The goal: help you decide which one fits better with your risk appetite and investment horizon.
A retail investor recently posed a familiar question: “Should I invest in small-cap or mid-cap funds right now?” It’s a classic dilemma and unfortunately, there’s no one-size-fits-all answer.
Both categories promise high rewards but come with equally high risks. So before you dive in, let’s see how the two stack up on key parameters.
Understanding mid- and small-cap funds
As per SEBI, mid-cap companies are those ranked from 101st to 250th by market value. Small-caps? That’s all companies beyond the 250th rank.
Interestingly, both mid- and small-cap funds are required to invest at least 65 per cent of their money in their respective categories. But the remaining 35 per cent is fair game, where fund managers can dip into large-caps, mid-caps or small-caps as they please.
Because of this flexibility, the average mid-cap fund holds around 69 per cent in mid caps, 16 per cent in large caps, and 15 per cent in small caps, while the average small-cap fund has about 77 per cent of its assets in small caps, 17 per cent in mid caps and 6 per cent in large caps.
We also compared their sectoral preferences. The table below highlights the top five sectors for both mid-cap and small-cap funds.
Sectoral preference: More alike than different
Here’s a quick look at the top five sector allocations for both categories:
| Mid-cap funds | Small-cap funds |
|---|---|
| Financial - 19% | Industrials - 21% |
| Industrials - 17% | Financial - 18% |
| Consumer Discretionary - 14% | Consumer Discretionary - 15% |
| Healthcare - 11% | Materials - 14% |
| Technology - 11% | Healthcare - 10% |
| Data as of June 30, 2025. Category average considered for both funds | |
No plot twists here. The top three sectors are identical, just shuffled around a bit in terms of weight. The only real shake-up? Technology sneaks into the mid-cap top five, while Materials finds its way into the small-cap list.
Now, let’s turn our attention to what really matters, long-term returns and how these funds hold up when the going gets tough. After all, it’s not just about shining in bull runs, but also about surviving the storm.
Returns and resilience comparison
The past few years have been nothing short of spectacular for equity markets, and the performance of mid- and small-cap funds says it all. As of August 7, 2025, mid-cap funds delivered an impressive 22 per cent and 28 per cent annualised return over the last three and five years, respectively. Over the same period, their small-cap counterparts went a step further with 23 per cent and 32 per cent annualised returns, respectively.
Impressive? Absolutely. But does this momentum hold over the long term as well? To find out, we looked at seven-year rolling returns over the last decade, which is a more reliable way to assess how these funds have fared through multiple market cycles. The following graph shows this comparison.
Clearly, small-cap funds usually have the lead over mid-caps. In fact, they outperformed mid-cap funds 92 per cent of the time based on seven-year rolling returns.
However, the margin of outperformance is modest, just 0.97 percentage points. To put it in numbers, mid-cap funds delivered an average seven-year rolling return of 15.70 per cent, while small-cap funds averaged 16.66 per cent over the same period.
So yes, small-caps led more often but just by a whisker.
What about returns during market crashes? It’s well known that both mid- and small-cap funds tend to fall harder when the markets turn sour. But between the two, which one takes a bigger hit? Let’s take a closer look.
To see how these funds perform during market crashes, we looked at something called "drawdowns", which basically means how much the market fell from its highest point to its lowest point during a rough patch. Since different funds hit their highs and lows at different times, we focused instead on how the broader indices—Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI—performed during these falls. This helps us understand how mid-cap and small-cap stocks behave when markets get rocky. We also checked how long each took to bounce back.
The key takeaways are shown in the table below.
Fall, hit, recover: Mid cap vs Small cap
A look at drawdowns and recovery timelines for Nifty Midcap 150 TRI and Nifty Smallcap 250 TRI during crashes
| Crash & recovery period | Drawdown (Midcap/Smallcap) | Recovery - in months (Midcap/Smallcap) |
|---|---|---|
| May-06 to Jan-07 | -38% / -38% | 7/4 |
| Feb-07 to May-07 | -17% / -17% | 3/3 |
| Jan-08 to Jun-14 | -73% / -76% | 63/64 |
| Aug-15 to Jun-16 | -18% / -23% | 4/4 |
| Jan-18 to May-21 | -43% / -60% | 8/14 |
| Oct-21 to Jun-23 | -21% / -27% | 3/12 |
In the first three market corrections, both mid-cap and small-cap indices fell by similar margins and recovered in roughly the same time. But in the subsequent three downturns, small-caps experienced steeper declines and slower recoveries.
For instance, between January 2018 and May 2021, the small-cap index fell 17 percentage points more than the mid-cap index and took six additional months to bounce back. Likewise, during the 2021-2023 phase, the mid-cap index recovered in about three months, while the small-cap index took nearly nine more months.
This underscores the higher risk associated with small-caps. Even if they may not always fall harder than mid caps, but when they do, recovery can take significantly longer.
What do we recommend?
That’s a tough pick.
Over the long term, both categories have delivered similar returns. And both belong to the high-risk, high-reward end of the equity spectrum.
So, unless you have a long investment horizon, at least seven years, and the temperament to stomach wild swings, these aren’t your cup of tea. Investors with a lower risk appetite or shorter time frames are better off sticking with large-cap or diversified funds.
But if you have a high risk appetite and don’t flinch easily during market crashes, you can consider allocating a portion of your portfolio to mid- and small-cap funds. You can even split your bet between the two.
But if we had to pick just one, mid-caps might be the more sensible choice. They’ve almost matched small-caps in long-term returns, tend to fall a bit less during some rough patches, and usually bounce back a little quicker.
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Also read: Mid-cap or small-cap funds: Which suits your portfolio best?
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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