Small-cap funds see rising inflows: Are Indian investors chasing returns at cost of risk? Experts explain

Over the last six years, Indian mutual fund investors have continued to increase their exposure to small-cap funds. Each year, the inflow in small cap funds has risen, while large-cap funds have not seen the same pace of growth.

Small-cap funds attracted ₹ 1,386 crore in 2020, and it further surged to ₹ 52,321 crore last year. In comparison, large-cap funds saw an outflow of ₹ 2,356 crore in 2020. Although they attracted ₹ 25,483 crore in 2025, the inflow remained significantly lower than that of small-cap funds, according to annual data published in NSE Market Pulse, January 2026.

This trend appears to have continued in 2026. AMFI monthly data showed that small-cap funds led growth in the equity segment in July, with inflows rising to ₹ 7,768 crore from ₹ 5,602 crore in June, an almost 39% jump. Meanwhile, large-cap funds seeing an outflow of ₹ 1,322 crore.

Small-cap investing involves higher risk compared to many large-cap-oriented schemes as the former investment option can experience sharp price movements during both rising and falling markets. Additionally, shares of smaller companies may be traded less frequently than large-cap stocks , which can impact liquidity.

At first glance, this may seem like a shift in how Indians invest. Earlier, investors, including our parents, often preferred fixed deposits, government schemes or real estate, as these options offer relatively predictable returns. But with more young individuals turning to market-linked products, are new-age investors becoming more comfortable with risk? Here's what experts have to say.

Explaining this shift, Wert Finserve's Prithvi Potta, said that the previous generation invested in plots, LIC and post-office schemes, FDs offering 11–15% returns and physical gold. These investments also carried risks such as title disputes, encroachment, theft, reinvestment risk, but unlike market-linked assets, they did not show a daily price, he added.

“Investors were never truly risk-averse, they were risk-blind,” Potta said. He also explained that the real differentiator was never the asset class but the investor's ability to safeguard, diversify and stay patient.

Speaking of factors that are driving the appetite for small-cap funds, a Sebi-registered investment advisor and the Founder of Wealth Aligned Financial Advisory, Harendra Zatakia, said that the most obvious factor is the segment's recent performance in terms of returns.

“Smallcaps and midcaps have done well relative to large caps over several periods, and investors naturally notice where returns have been better,” he said.

A lot of India's newer growth themes, defence manufacturing, capital expenditure, electronics, manufacturing, digital businesses, fintech, logistics and new-age consumption are not yet fully represented in the traditional large-cap universe, Zatakia noted.