Data from March shows a sharp rise in flows into these categories, indicating that investors are increasingly using market corrections as an opportunity to invest rather than exit. This reflects a growing maturity among domestic investors, who are continuing systematic investments and even adding lump sum allocations during market dips.
According to Chirag Mehta, CIO at Quantum AMC, this trend suggests investors are taking a longer-term view. “It kind of tells us that the SIP continuation, and this is another layer of addition in terms of maturity, shown by investors in the market that they took advantage of the fall that we saw in markets because of global reasons.”
One of the key positives for mid and smallcaps is the correction in valuations over the past year. Earlier, these segments were trading at elevated multiples, but recent consolidation and earnings growth have brought valuations to more comfortable levels.
This has opened up opportunities across sectors, especially where earnings visibility remains strong.
Ankit Jain, Sr Fund Manager at Mirae Asset Mutual Fund finds value in several pockets within the mid and smallcap space. Financials, including private sector banks, NBFCs, and insurance companies, continue to look attractive.
Healthcare and pharmaceuticals, particularly contract research and manufacturing (CRO/CDMO) and hospital businesses, are also gaining traction.
Export-oriented sectors such as chemicals, auto ancillaries, and industrial consumables are expected to benefit as global trade conditions stabilise. Logistics is another sector that is increasingly being seen as a structural growth story.
However, not all sectors are equally attractive. Some caution remains around areas like chemicals due to weak demand trends, while IT and FMCG may face structural growth challenges and increased competition.
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Jain, highlighted that earnings expectations may see some moderation in the short term, but the broader trend remains intact.
At an aggregate level, he expects earnings for FY27 to be revised down by around 5–7%. Initial estimates had pegged midcap and smallcap earnings growth at about 20%, but this could moderate to the mid-teens. However, from FY28 onwards, earnings growth is likely to recover to the high-teens range, supported by strong macro fundamentals and improving trends seen over the past few quarters.
While the outlook is constructive, investors need to remain cautious about certain risks. Persistent inflows into mid and smallcaps can sometimes lead to stretched valuations in specific pockets.
Global uncertainties, including geopolitical tensions, oil price movements, and supply chain disruptions, could also impact earnings in the near term.
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