Mid-cap rally continues: What’s driving inflows and how should investors navigate the market

Over the past two-and-a-half months, the Nifty midcap indices have delivered healthy returns, compared to the gains provided by the Nifty 50 index in the same period. Market analysts, however, have cautioned investors to avoid irrational exuberance while considering investments in mid-cap stocks.

What are mid-cap stocks?

SEBI has categorised companies as large, mid and small-cap based on their market capitalisation to maintain uniformity in terms of the investment universe for equity schemes. The top 100 companies in terms of market capitalisation are categorised as large-cap, while mid-cap companies are those ranked from 101st to 250th in terms of market capitalisation. Companies ranked from the 251st position lie in the small-cap category.

In terms of actual valuation, mid-cap companies fall in the range of Rs 5,000 crore to Rs 20,000 crore. Mid-cap stocks offer higher returns compared to large-cap funds but are riskier.

Strong mid-cap rally

Performance of NIFTY and NIFTY Midcap indices (Source: NSE)

Market interest in the mid-cap stocks has remained robust, with Nifty Midcap 50, Nifty Midcap 100 and Nifty Midcap 150 touching record highs of 17,444.50, 61,180.50 and 22,482.40, respectively, on November 17. Since 2025, mid-cap indices have delivered returns in the 8-11 per cent range, higher than Nifty 50, which gained 6.5 per cent over the same period.

Between September and October, retail investors have poured in Rs 8,892.51 crore in the mid-cap stocks through the mutual fund route. Higher inflows have driven the net assets under management (AUM) of mid-cap stocks outpacing that of large-cap funds, reflecting a growing preference for mid-cap equities. In October 2025, the net AUM of mid-cap stocks stood at Rs 4.55 lakh crore, as against Rs 4.1 lakh crore for large-cap funds

Factors driving mid-cap stock inflows

Nifty mid-cap indices made fresh highs driven mainly by renewed domestic institutional flows (mutual funds/SIPs), better near-term earnings momentum in mid-cap cohorts, and positive domestic liquidity or monetary cues, said independent analyst Ajay Bagga.

“The market hasn’t witnessed any dramatic shifts, but the underlying sentiment remains bullish, which is lifting select stocks. Many of these names are supported by strong recent quarterly results or positive news flow,” said Shrikant Chouhan, Head-Equity Research, Kotak Securities.

With the Nifty trading close to its all-time high, investors typically look for value opportunities, and this trend is visible in the Nifty mid-cap indices as well. Stocks such as BSE, Federal Bank, Muthoot Finance, Biocon, NALCO, BHEL and Vodafone Idea have seen substantial buying interest.

According to Bagga, several mid-cap companies have reported improving quarterly results and upgrades. “When earnings pick up, mid-caps (which are more cyclical/earnings-sensitive) tend to show outsized moves,” he said.

After long stretches of large-cap leadership, portfolio managers and domestic institutional investors/retail have rotated to mid-caps seeking growth, he said.

“Between 2020 and 2024, mid-cap and small-cap stocks have given double-digit returns. Retail investors are under the assumption that these returns will continue, and this is fueling the demand for mid-cap stocks,” said VK Vijayakumar, Chief Investment Strategist, Geojit Investments Ltd.

Investors remain bullish on mid-cap stocks

Stock-specific buying is likely to continue in the mid-cap segment as long as broader indices like the Nifty and Sensex maintain a positive bias, said Chouhan. Additionally, strong domestic institutional liquidity continues to support value buying with a long-term perspective.

Valuation risks continue

Market participants said that valuation in mid-cap stocks remains elevated, posing a potential risk for investors.

According to Geojit’s Vijayakumar, the price-to-earnings (P/E ratio) of small and mid-cap is 33, whereas the price-to-earnings multiple of large caps is only 22. Normally, the price-to-earnings multiple of large caps should be higher because of the safety these stocks provide. The current trend shows that there is a structural and fundamental misallocation happening in mid and small-caps, he said.

“This (higher inflows into mid and small-cap stocks) is sort of an irrational exuberance and not justified by fundamentals,” he said.

Investor caution warranted

When it comes to mid-cap stocks, retail investors should be selective, stagger their entries, cap their position sizes, and prefer quality or professional active management rather than indiscriminate buying, said Bagga.

“For retail investors—especially newcomers—it is advisable to take the mutual fund route to gain diversified exposure to mid-cap companies,” said Chouhan.

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