2 weeks ago
Record small-cap fund inflows raise fears of repeat 2024 mistake
People in India who save money sometimes put it into mutual funds, which are baskets of many different investments.
Small-cap funds buy shares of small companies.
These funds became very popular again, and in July 2026 people put a record amount of money into them.
Small companies' stocks have lately done better than big companies' stocks, which makes people excited.
But some experts are worried this has happened before and ended badly.
In 2024, the market watchdog called SEBI asked these funds to run 'stress tests'.
A stress test checks how quickly a fund could sell its shares if everyone suddenly wanted their money back.
The latest tests show funds can sell their shares faster than six months ago, which is a good sign.
However, experts still say small-cap investing is risky and people should plan to keep their money invested for at least five years.
The biggest mistake, they say, is chasing past good returns instead of sticking to a long-term plan.
Small-cap funds received a record Rs 7,768 crore inflow in July 2026, nearly 39% higher than June's Rs 5,602 crore.
The Nifty Smallcap 250 gained 14.83% over six months and 9% over one year as of August 13, 2026, while the Nifty 50 fell 4.55% in the same six-month window.
In 2024, SEBI ordered liquidity stress tests for small- and mid-cap schemes, worried about 'froth' and the risk of investors rushing for the exit at once.
Liquidity has improved: Nippon India Small Cap Fund's 50% portfolio liquidation estimate fell from 38 days in January to 26 days in June 2026.
Small-cap fund AUM rose about 24% to Rs 4,41,099.91 crore by July 31, 2026, outpacing the overall mutual fund industry's roughly 14% growth.
- Who
- Indian investors pouring record money into small-cap mutual funds, with regulators at SEBI and experts Sadiya Khan of Mirae Asset Sharekhan and Amitabh Lara of Anand Rathi Wealth Limited watching the trend.
- What
- Small-cap funds saw record monthly inflows and improved liquidity stress-test results, prompting debate over whether investors are repeating the return-chasing behaviour that preceded the 2024 small-cap correction.
- Where
- India's mutual fund industry.
- When
- July 2026 for the record inflows; returns and stress-test data as of August 13, 2026 and June 2026 respectively.
- Why
- Strong recent small-cap returns and a wider stock-selection universe attracted inflows, but experts warn of recency bias and the risk of forced selling if redemptions surge during a market fall.
Caution against return-chasing
Justified by performance and opportunity
Why investors are returning
Caution against return-chasing
Experts warn inflows look like recency bias: investors assume recent small-cap outperformance will continue, repeating the pattern that preceded a roughly 23% correction between September 2024 and March 2026.
Justified by performance and opportunity
The renewed rush is partly explained by the segment's superior returns (Nifty Smallcap 250 up 14.83% in six months) and a much larger stock-picking universe for managers than the 50-stock Nifty 50 offers.
Has the liquidity risk eased?
Caution against return-chasing
The original SEBI concern about 'froth' has not disappeared; if everyone tries to exit during a sharp fall, forced selling could still push prices down, and a stress-test number is only one part of risk assessment.
Justified by performance and opportunity
Latest stress tests show marked improvement — Quant Small Cap Fund's 50% liquidation estimate fell from 102 days in January to 45 days in June — so liquidity risk is more manageable now than in 2024.
How investors should respond
Caution against return-chasing
Sadiya Khan recommends not stopping small-cap SIPs on corrections but staggering fresh money during volatile periods, keeping a five-year horizon and reviewing allocation at least once a year.
Justified by performance and opportunity
Amitabh Lara argues corrections are normal — small caps have averaged around 25% annual declines over 25 years with recovery to previous peaks within 12-18 months — so the bigger danger is changing strategy with every market move.
Key facts
- July 2026 small-cap inflows
- Rs 7,768 crore (record monthly figure)
- June 2026 small-cap inflows
- Rs 5,602 crore
- Nifty Smallcap 250 returns (Aug 13, 2026)
- 14.83% (6-month); 9% (1-year)
- Nifty 50 returns (Aug 13, 2026)
- -4.55% (6-month); -1% (1-year)
- Small-cap fund AUM (July 31, 2026)
- Rs 4,41,099.91 crore (up ~24% from a year earlier)
- Mutual fund industry AUM (July 31, 2026)
- Rs 85,75,656.52 crore (up ~14%)
- Largest small-cap scheme
- Nippon India Small Cap Fund, AUM Rs 78,400.06 crore
- 50% liquidation estimate (June 2026)
- Nippon India 26 days, HDFC 46 days, Quant 45 days (vs 38, 75 and 102 days in January 2026)
Quotes
Amitabh Lara
Executive Director at Anand Rathi Wealth Limited
“She cautions that a sudden increase in redemption pressure could again hurt liquidity, and investors should have a minimum five‑year investment horizon, avoid making decisions based on short‑term market sentiment or panic, and check liquidity metrics and stress‑test results before investing.”
financialexpress.com
“Amitabh Lara, Executive Director, Anand Rathi Wealth Limited, points out that fund managers would generally use available cash first and then sell more liquid holdings before selling less‑liquid small‑cap stocks.”
financialexpress.com
Sources
Related news
Small-Cap SIP Surge Raises Valuation And Liquidity Risks
SEBI data: Small-cap funds take longer than mid-caps to liquidate
21 small-cap funds deliver over 15% returns in six months
Nippon Small Cap Fund outperforms despite enormous Rs 78,000-crore size
Small-Cap Funds Still Offer Potential, But Selectivity Matters
Ashish Dhawan Builds Religare Stake Amid Restructuring Uncertainty
Why SIPs Alone Cannot Guarantee Financial Security
Rays of Belief IPO Draws Retail Demand, QIBs Hold Back
Foreign Portfolio Investors Buy ₹30,918 Crore as Markets Stay Cautious
Why Young Investors Should Not Avoid Debt Mutual Funds
