Mid-Cap Funds in 2025: Rising Assets, Falling Returns

Mid-Cap mutual funds are witnessing record inflows in 2025, with retail investors pouring money despite weak returns and stretched valuations. This article explores the paradox of rising assets amid disappointing performance, the role of IPO supply and institutional caution, and whether GST reforms and macro shifts can help mid-caps grow into their lofty valuations [EasyDNNnews:PaidContentStart]

Mid-cap mutual funds in India are witnessing a paradoxical trend. Investors are pouring substantial money into these funds, even as their recent returns have disappointed. Robust inflows have pushed category assets to new highs, but mid-cap stocks have underperformed larger peers over the past year. This raises a critical question: with valuations looking stretched, can the optimistic outlook implied by these inflows be justified by future performance? In this deep-dive, we examine the forces driving strong inflows into mid-cap funds, the causes of weak returns, and whether upcoming macroeconomic shifts – like GST tax cuts and trade tariff changes – might turn the tide. 

Retail Money Pours In Despite Sluggish Performance 

Indian investors’ appetite for mid-cap equity funds has been unabated, even as returns remain lacklustre. Month after month, mid-cap mutual funds have attracted significant net inflows. In fact, industry data show that mid-cap funds drew ₹5,182 crore of net inflows in July 2025 alone, a 38 per cent jump from June. This was part of a record-breaking ₹42,702 crore overall equity inflow in that month, marking the 53rd consecutive month of net positive flows into equity schemes. 

Mid-cap funds have collected ₹27,053 crore in fresh investments in 2025 (up to July), already nearing their total for all of 2024. Retail investors, through systematic investment plans (SIPs) and lump sums, continue to place their faith in mid-cap oriented schemes, even as some institutional money has turned cautious. 

Monthly net inflows (in ₹ Cr.) into Indian equity mutual fund categories show mid-cap funds (blue lines) attracting much higher investments in 2025 compared to Large-Cap funds (orange line). July 2025 saw record inflows into all equity categories. 

Such inflows have enabled this fund category to post stronger AUM growth, despite returns being less than encouraging. 

AUM (₹ Cr.) of Mid-Cap Funds In Last One Year 

Yet, the performance of mid-cap stocks has not kept pace with this enthusiasm. Mid-cap equity funds on an average have delivered negative return of 3.68 per cent over the past year, and have been roughly flat year-to-date with negative average of around one per cent. By comparison, large-cap funds (which track blue-chip stocks) are faring slightly better – the Nifty 50 index was up about 4–5 per cent in 2025 through late summer. Small-Cap funds, while also enjoying huge inflows, have seen even weaker performance (small-cap indices are down roughly 6.75 per cent over the last year). International equity funds have vastly outperformed, with some global-focused schemes posting double-digit gains amid a tech-led overseas rally (nearly +30 per cent in one year for the category), highlighting how mid-caps have lagged in relative terms. In July 2025 specifically – a month of record inflows – India’s mid-cap index still slid 3.9 per cent, and small-caps fell 5.8 per cent, even as the benchmark Nifty 50 declined 2.9 per cent. In short, investors have been buying the dip in mid- and small-cap funds, but the market has not yet rewarded that optimism with commensurate returns. 

The resilience of flows amid weak performance is striking. Fund managers note that individual investors have continued to pour money despite concerns over stretched valuations and recent underperformance. Contributions via SIPs hit an all-time high of `28,464 crore in July, indicating steady retail commitment. This steady inflow of cash has provided a liquidity buffer that arguably prevented deeper corrections in mid-cap stocks. This clearly signals a growing appetite for diversified growth even in a volatile environment. Clearly, the faith of retail investors in the long-term growth story of mid-caps remains intact, for now. 

Mid-Caps Underperform: What’s Holding Them Back? 

If so much money is chasing mid-cap stocks, why have returns been weak? There are a confluence of factors that have kept mid-cap performance muted despite the cash infusion: 

▪️Excess Supply of Shares: A wave of share sales has absorbed much of the incoming investment. Promoters and private equity investors have been offloading stakes, and there has been an uptick in IPOs in the mid- and small-cap space, increasing available supply of shares. This constant supply has acted as a drag on prices. Significant supply from promoters and PE exits, and a surge in IPO activity – meaning a lot of the fresh money pouring in simply goes toward buying these newly available shares, rather than boosting existing stock prices. In fact, about `72,400 crore was raised via IPOs in the first half of 2025, many of them mid/small-cap companies, which soaked up liquidity. Mutual funds have been at the forefront in soaking up this supply. According to a finding, fund houses invested `5,294 crore in IPOs during the June 2025 quarter alone, with a notable tilt towards small-cap companies. This signals a strategic shift away from the comfort of large caps toward emerging growth stories. 

▪️Cautious Big Investors: Even as retail investors buy, institutional investors (domestic and foreign) have turned cautious on mid-caps. Many domestic institutional funds and wealthy investors are reallocating to large-caps, which they view as safer in the current environment. This rotation is partly because large-cap valuations now appear more attractive after the recent time correction if not the price correction as they are marginally down in the last one year, and large companies have proven resilient during periods of global uncertainty. In contrast, mid- and small-caps – which led the bull run up to late 2024 – are seeing profit-booking by those early investors who chased high returns. Brokers report that some retail stockholders have begun cutting exposure to mid/ small-caps and moving into blue-chips after witnessing sharp portfolio corrections. This shift in preference means mid-cap stock prices face resistance in climbing, as selling pressure emerges on rallies. 

▪️Lacklustre Earnings: Fundamentally, corporate earnings have yet to catch up with the lofty expectations embedded in mid-cap stock prices. Many mid- and small-cap companies delivered underwhelming results over the past few quarters, which does not justify their rich valuations. Though in Q1FY26 they saw some improvement, valuations are still stretched. With profit growth stalling, even strong inflows cannot push prices sustainably higher. The narrower profit base and higher vulnerability to economic hiccups in mid-cap firms make investors more skittish when growth disappoints. In short, money has been flowing in, but earnings have not risen in tandem, suppressing stock performance. 

▪️Valuations at Highs: Perhaps the biggest overhang is valuation. After a massive rally in 2020–2024 end, mid-cap stocks became expensive, and even after this year’s corrections they trade at historically high multiples. As of July 2025, the Nifty Midcap index was priced at around 33.8 times forward earnings, far above its 10-year average of 22.4x. By contrast, the blue-chip Nifty 50’s P/E was ~19.9x, roughly in line with its long-term norm. In other words, mid-caps were (and remain) priced to perfection, leaving little room for error. These elevated valuations are a direct result of the prior 250 per cent surge in mid-cap indices from 2020 to 2024, fuelled largely by retail and mutual fund money. Now, with mid-caps trading at a premium, investors are questioning whether future growth can validate these price levels. Until earnings growth accelerates or prices correct further, this valuation ceiling tends to cap any sustained rally. 

Movement of Nifty Mid Cap 150 Index In Last One Year
Mid- and small-cap indices suffered a sharp correction from late 2024 into early 2025, erasing a portion of their multi-year gains. By February 2025, the Nifty Smallcap 100 index had plunged over 21 per cent from its peak (entering bear market territory) and the Midcap 100 was down ~18 per cent. Despite these declines, both indices were still trading well above their historical average valuations, reflecting how ‘priced-in’ the prior optimism was. 

Macro Winds: GST Reforms and Tariff Turbulence 

Amid these microeconomic factors, broader macroeconomic trends are also influencing the mid-cap outlook. Two developments in particular – a sweeping cut to Goods and Services Tax (GST) rates and international tariff disputes – are creating cross-currents for mid-sized companies. GST Overhaul (GST ‘2.0’) – A Tailwind for Some Mid-Caps: In a bid to spur consumption and simplify taxes, India’s GST Council approved major tax rate cuts and slab restructuring in September 2025. The government collapsed the multiple GST slabs into just two primary rates (5 per cent and 18 per cent), while reducing or eliminating tax on several consumer-oriented categories. This reform slashed GST on a range of mass-market products: 

Automobiles: GST on most cars (especially small cars and two-wheelers) was cut from 28 per cent to 18 per cent, and on tractors to 5 per cent, significantly lowering vehicle prices. 

Consumer Goods: Fast-moving consumer goods (FMCG) like daily essentials saw GST dropped to 5 per cent (from 12–18 per cent earlier). Appliances and durables like ACs and TVs had tax reduced to 18 per cent from 28 per cent. 

Other Sectors: Logistics, cement, retail, insurance, and hotels – largely domestic-facing sectors – are poised to benefit from tax rationalisation, which should boost demand and reduce costs. Meanwhile, only luxury products (high-end bikes, premium apparel, etc.) face higher levies of 40 per cent. 

For mid-cap companies, many of which operate in these consumer discretionary, auto ancillary, building material, and financial segments, the GST cut is a potential boon. Lower taxes mean potentially higher sales volume as goods become cheaper, and possibly improved profit margins if demand rises. Many of the market experts forecast that these tax cuts could unlock ₹1.8 lakh crore a year (0.6 per cent of GDP) in household savings, which can fuel spending. Sectors like autos, consumer durables, cement, and insurance – which include many mid-cap firms – stand to gain meaningfully. In essence, the GST reform could provide a fundamental tailwind that helps mid-cap earnings catch up to valuations in coming quarters, especially for those serving the domestic market. 

Tariff Turmoil and Trade Tensions
Another macro factor has been the volatile trade relationship between the U.S. and India this year. Early in 2025, fears of a tariff war cast a shadow over market sentiment. The U.S. administration had signalled steep reciprocal tariffs on imports from several countries (including India), raising concerns about export-oriented Indian companies. This uncertainty contributed to heightened market volatility in the first quarter. In fact, mid- and small-cap stocks – many of which have global exposure – tumbled amid the trade tension, with the Nifty Midcap 100 index sliding nearly 16 per cent between January and early April 2025. 

For mid-cap companies, many of which are exporters in sectors like specialty manufacturing, textiles, chemicals, or IT services, easing trade tensions is crucial. The tariff tussle introduced volatility: it triggered market corrections (which savvy domestic investors used as buying opportunities) and then relief rallies on positive news. In sum, global trade developments have been a wild card for mid-cap stocks – a negative when tensions rise, but a potential positive catalyst if a favourable deal is sealed. Going forward, clarity on the U.S.-India trade front could remove one overhang for mid-caps, allowing investors to refocus on domestic fundamentals. 

Outlook: Cautious Optimism or Further Correction?
Looking ahead, the big question is whether mid-cap funds’ stellar inflows will eventually be validated by a turnaround in returns – or whether a reckoning is due if the performance does not improve. The answer likely hinges on whether earnings and economic momentum catch up with valuations, and whether investor psychology shifts. 

On one hand, there are reasons for cautious optimism. Supportive macro factors are aligning: inflation has been moderating, interest rates have stabilised, and with the GST cuts, consumer demand could revive in many mid-cap-driven companies. If corporate earnings in the next couple of quarters reflect these tailwinds – say, auto firms selling more vehicles post-GST cut, or manufacturers benefiting from steady input costs – mid-cap stocks could see fundamental justification for their valuations. Liquidity conditions remain favourable too: domestic liquidity is strong thanks to steady SIP investments, and any resolution of global uncertainties (trade deals, geopolitical tensions easing) could bring back foreign investors, adding fuel to a mid-cap rally. 

Some analysts believe mid-caps are well-positioned to sustain an uptrend now that excess froth has been partially blown off. In other words, if India’s economic story remains intact and no new shocks arise, mid-caps could potentially deliver on the high expectations. 

Ultimately, the outlook for mid-cap funds appears to be a race between growth and valuation. Either earnings and economic growth accelerate to validate the high valuations (a best-case scenario likely hinging on consumption revival post-GST cuts, continued policy support, and global stability), or valuations will need to moderate (via price corrections or time-wise consolidation) to better align with fundamentals. The strong inflows indicate that many investors are betting on the former – that India’s mid-sized companies will grow into their valuations given time. But as of now, valuations leave little margin for error, and the market has punished mid-caps for any missteps, as seen this year. 

The mid-cap segment currently stands at a crossroads, with strong inflows from investors on one side and stretched valuations on the other. Supportive factors such as moderating inflation, stable interest rates, and the potential boost in consumption from GST cuts could provide earnings momentum for many mid-cap companies in the coming quarters. However, the challenge remains that valuations already factor in high expectations, leaving little margin for error if corporate results fall short. For retail investors, the best approach in this environment is to stay disciplined and avoid the temptation of aggressive lump-sum allocations. We believe that investors should continue with their SIPs in mid-cap funds, as this ensures cost averaging and helps navigate market volatility more smoothly. Large one-time investments, however, can expose investors to near-term risks if the market undergoes a correction, so a staggered approach or systematic transfer plan (STP) is advisable for fresh allocations. At the same time, diversifying portfolios with sturdier large-cap funds can provide stability and balance. Mid-caps remain an attractive long-term wealth creation opportunity, but investors should align exposure with their risk tolerance and investment horizon. The outlook is one of cautious optimism—stay invested, stay disciplined, and let time work in your favour. 

The outlook for mid-cap funds appears to be a race between growth and valuation. Either earnings and economic growth accelerate to validate the high valuations (a best-case scenario likely hinging on consumption revival post-GST cuts, continued policy support, and global stability), or valuations will need to moderate (via price corrections or time-wise consolidation) to better align with fundamentals. 

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