Mumbai: Retail investors have continued to plough high sums into mid and smallcap mutual fund schemes as they chase high returns, despite elevated valuations and advisories on moving to safer ground. Retail investors have invested ₹20,255 crore into these mutual funds in the first three months of this financial year, accounting for 30% of total equity inflows of ₹66,689 crore. Association of Mutual Funds of India data also show that, over the past year, investors have poured ₹90,075 crore into these funds, accounting for 23% of total equity flows of ₹3.9 lakh crore.

“A lot of retail investors continue to chase past performance,” said Harshvardhan Roongta, principal financial planner, Roongta Securities. “Returns from mid and smallcap funds for three and five-year periods have been very high compared to large caps, which has kept investor interest intact.”

Midcap funds returned an average 21.3% over the past three years and 27.4% over five years, according to Value Research data. Smallcap funds returned 21.94% in three years and 31.28% in five. The Nifty 50 returned 13.55 in three years and 18.58% in five.

“Investors are looking to get exposure to some of the faster-growing segments of the economy, reflected in their preference towards midcap and smallcap funds,” said Dikshit Mittal, senior fund manager, equity, LIC Mutual Fund.

ICICI Prudential Mutual Fund said in its monthly outlook report for July that both mid and smallcap indices continue to trade at significantly higher valuation multiples compared with historical averages, even though they have cooled off from their September 2024 highs.

In terms of price to earnings (PE) ratio, the Nifty Smallcap 250 is at 32 and the Nifty Midcap 150 at 33.4, while the Nifty 50 trades at a PE of 21.7. According to a study by Whiteoak Capital, while large caps are quoting at a 10% discount to their five-year average, midcaps are at a 14% premium and smallcaps are at a 28% premium to their long-term averages.Given the premium valuations of mid and smallcap funds, wealth managers have been asking investors to take a long-term view while allocating money and not expect high returns going ahead.”Aggressive investors should allocate only 10-15% of their equity portfolio to the mid and small cap space,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors. Dhawan urged investors to stagger investments using SIPs and have at least a 10-year view, else they are likely to be disappointed.