Smallcap vs Midcap: Choosing the Right Mutual Fund

I remember chatting with a friend over chai not long ago — she had just started a new SIP but was unsure whether she should put more into a smallcap or midcap fund. “Aren’t smallcaps riskier?” she asked. “But my colleague says they give better returns.” That moment sums up a dilemma most of us face as investors.

If you’ve ever opened your mutual fund app and felt unsure whether to pick a smallcap or a midcap fund, you’re not alone. These terms are everywhere, yet rarely explained in a way that connects to your real financial goals. Let’s break it down simply — from the lens of what matters to you as an Indian investor trying to grow wealth.

What Exactly Are Smallcap and Midcap Funds?

Smallcap and midcap funds are both equity mutual funds, but the difference lies in the size of companies they invest in, as defined by SEBI.

• Midcap funds invest in companies ranked 101st to 250th by market capitalisation.
• Smallcap funds invest in companies ranked 251st and beyond.

Think of it like a big Indian wedding. Largecaps are the well-known guests, midcaps are the successful cousins everyone respects, and smallcaps are the younger cousins with big potential — though not all of them may succeed. Midcaps usually represent stable, growing businesses. Smallcaps are more volatile but can deliver outsized returns if they perform well. Companies like Nazara Technologies or Syrma SGS started small but later gained prominence. That’s the promise smallcaps hold, even though the journey is far less predictable.

Performance vs Risk – What Should You Prioritise?

Here’s the truth: smallcap funds can be rewarding, but they demand patience. Historically, they’ve delivered higher returns in bullish markets but tend to fall harder during downturns. Midcaps, while also growth-oriented, usually recover faster and are less volatile.

Let’s say you invested ₹1 lakh each in a smallcap and midcap fund in 2020. By 2023, the smallcap might be worth ₹1.8 lakh, while the midcap stood at ₹1.5 lakh. But the ride in smallcaps would’ve been bumpier, with more gut-wrenching dips. That’s the trade-off. If you can stomach volatility and stay invested for 7–10 years, smallcaps could be suitable. But if you prefer steadier growth with fewer shocks, midcaps often make more sense.

How Do You Choose What’s Right for You?

There isn’t a universal answer. What works for you depends on your risk appetite, goals, and even personality.

Take Rohit, 29, a salaried professional in Bengaluru. He has no dependents, a long time horizon, and wants aggressive growth. Smallcaps might suit him because he can ride out volatility. Now take Priya, 42, who runs a business in Surat. She wants her investments to grow but dislikes wild swings. A larger share in midcaps, with some smallcap exposure, works better for her.

The lesson? Your financial goals, time horizon, and ability to stay calm during market falls matter more than chasing the “best” returns. For most investors, a blend of smallcap and midcap — with some largecap exposure — creates balance.

Tips to Build a Smarter, Balanced Portfolio

When building your portfolio, resist the temptation to go all-in on smallcaps just because they’ve delivered strong recent returns. Markets move in cycles, and today’s winners may lag tomorrow. A healthier mix might include largecaps for stability, midcaps for growth, and a portion of smallcaps for long-term wealth creation. SIPs are especially helpful — they average out your cost and reduce the stress of timing the market. Liquidity is another factor. Smallcap funds can be harder to exit during downturns. If you suddenly need cash — say, for a medical emergency or a child’s tuition — redeeming them may not be the best option.

That’s where a Loan Against Mutual Funds (LAMF) can help. Instead of redeeming your investments, you can pledge them and borrow at relatively lower interest rates. This way, your long-term wealth creation stays intact while you meet immediate needs. At Quicklend, we’ve seen many professionals and business owners rely on this route to manage short-term liquidity without disturbing their investments.

Conclusion

There’s no one-size-fits-all fund. Smallcaps reward patience but test nerves. Midcaps balance growth with stability. The right choice is the one that fits your goals and tolerance for risk. As Indian investors, we have more opportunities than ever before. The trick lies in choosing wisely, staying consistent, and not letting emotions drive your decisions.

This is general guidance. For personalized loan advice, contact our team at Quicklend.