Stock market: Indian retail investors, who have actively invested in mid- and small-cap stocks in recent years due to their relatively low trading prices compared to large caps, now seem to be gradually shifting away from them.

Increased volatility in domestic markets, driven by both local and global headwinds, coupled with weak earnings, has made these segments major casualties in the sustained sell-off in local equities, prompting investors to pull away from this space.

The prolonged weakness in the market has turned investor sentiment cautious, which is reflected in the drop in trading volumes, delivery volumes, and even the opening of new demat accounts.

Further reinforcing their cautious approach to the market, investors have also scaled back their mutual fund investments, a trend that had gained significant popularity in recent years, attracting billions in retail savings.

Equity mutual fund inflows declined for the second consecutive month in February, according to data released by the Association of Mutual Funds in India (AMFI) on Wednesday, primarily due to a sharp reduction in investments in small- and mid-cap schemes.

This also marked the second straight month of decline in equity fund inflows. However, net equity inflows continued for the 48th consecutive month in February. Overall, net inflows into mutual funds (including debt) plunged 79%.

Equity-oriented mutual funds saw an inflow of ₹29,303 crore in February, significantly lower than the ₹39,688 crore registered in January and ₹41,156 crore in December.

For February, inflows through the systematic investment plan (SIP) route fell to a three-month low of ₹25,999 crore, down from ₹26,400 crore in January. The SIP AUM fell to ₹12.38 lakh crore from ₹13.19 lakh crore in the previous month. SIP stoppage stood at 123% in February, up from 109% in January 2025.

Large-cap funds see a modest dip as mid- and small caps struggle

Looking at the segment wise, inflows into mid- and small-cap funds fell to ₹3,406 crore and ₹3,722 crore in February, compared to ₹5,147 crore and ₹5,720 crore in January, respectively. Although inflows into large-cap funds also slowed during the month, the decline was less pronounced compared to mid- and small-cap funds.

Inflows into large-cap funds stood at ₹2,866 crore in February, down from ₹3,063 crore in January. Analysts have been warning about lofty valuations in mid- and small-cap stocks, and despite the sharp correction, they still see valuations as stretched.

According to analysts, heightened market volatility has shifted investor interest toward large-cap stocks, as valuations in this segment have somewhat aligned with fundamentals. Analysts also noted that during periods of heightened market volatility, large-cap stocks provide greater stability compared to mid- and small-cap stocks.

“Large-cap stocks currently offer attractive valuations; they also provide greater stability compared to mid- and small-cap stocks, especially during periods of market volatility. Their lower risk profile and established market position make them a reliable choice for investors seeking long-term resilience in uncertain market conditions,” said Nehal Meshram, Senior Analyst—Manager Research, Morningstar Investment Research India.

Small- and mid-cap funds witness explosive growth since 2020

Investors have poured billions into small- and mid-cap stocks in recent years through the demat account and mutual fund route, aiming for higher returns. For context, the AUM of small-cap funds reached ₹3.30 lakh crore by the end of 2024—six times higher than in January 2020.

Similarly, the AUM of mid-cap funds has surged to ₹4 lakh crore, marking a fourfold increase since January 2020, according to AMFI data.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.