Every market cycle brings its own favorites. In recent years, smallcap and midcap funds have dominated investor portfolios with their impressive performance. But as valuations climb and regulatory caution grows, investor focus may be starting to shift.
This has brought value funds back into focus. Once considered a conservative choice, value funds are now being seen as a potential middle path, offering growth opportunities with relatively lower risk.
In this article, we explore whether value funds are emerging as the next favorite for investors after smallcap and midcap funds and if they deserve a place in your portfolio.
The Rise and Pause of Smallcap and Midcap Funds
Smallcap and midcap funds have been at the center of retail investor enthusiasm in recent years. Their stellar returns and high-growth potential made them the preferred choice for those seeking to maximize gains.
In January 2025, smallcap funds saw inflows surge by 22.6% to ₹5,720.87 crore, setting a new all-time high. Midcap funds weren’t far behind, with inflows rising marginally to ₹5,147.87 crore, which was also a record for the category. These numbers highlighted the strong appetite among retail investors for higher-risk, higher-reward segments.
This trend was further supported by robust corporate earnings and the optimism of India’s economic growth story. Many retail investors, especially millennials and first-time participants, were drawn to small and midcap funds because of their success in previous bull markets. The excitement was visible in the rise of systematic investment plans (SIPs) and higher allocations towards these segments in monthly portfolios.
The Rise of Smallcaps and Midcaps
Here is why these funds have become an investor favorite.
High Growth Potential
Smallcap and midcap companies, often in their expansion phase, carried the promise of delivering exceptional returns. Their ability to grow rapidly and capture emerging opportunities made them a favorite among investors seeking consistent returns.
Positive Market Sentiment
A bullish market environment and rising retail participation through systematic investment plans further amplified investor interest. The buzz created by success stories on social media only strengthened the trend, drawing more investors into these categories.
Diversification Opportunities
These funds also provided exposure to sectors and businesses often underrepresented in largecap indices. For investors aiming to diversify beyond established blue-chip stocks, smallcap and midcap funds offered a gateway to a broader set of growth opportunities.
The Recent Decline in Inflows
However, these funds are not without some setbacks.
Rising Volatility and Stretched Valuations
These categories are highly sensitive to market cycles. With valuations climbing to elevated levels, concerns over sustainability have grown. Analysts and regulators have warned about overheating in these segments, pointing to their vulnerability during market corrections.
Dip in Fund Inflows
After months of record-breaking numbers, data from May 2025 indicates a slowdown:
Midcap funds recorded inflows of ₹2,808 crore, down from ₹3,313 crore in April, a 15% month-on-month decline.
Smallcap funds saw inflows of ₹3,214 crore, compared to ₹3,999 crore in April, a sharper 20% drop.
This pullback comes amid rich valuations in the mid and smallcap segments and rising global uncertainty, which has made investors more cautious about chasing high-risk categories. Experts believe this moderation reflects a healthy shift as investors rebalance their portfolios towards more stable options.
Value Funds Emerging as the Next Favourite?
Value funds focus on identifying fundamentally strong companies trading below their intrinsic value. These could be businesses temporarily out of favour with the market, offering long-term potential at discounted prices. Unlike growth funds that chase high-flying stocks, value funds lean on discipline and patience.
Value investing works best in phases where broader markets see corrections or where growth slows down, allowing fundamentally sound companies to shine. This approach helps investors ride out volatility with greater confidence.
As smallcap and midcap enthusiasm cools, investors are increasingly looking for a middle ground, funds that can deliver steady returns without the wild swings associated with smaller companies. This has turned the spotlight on value funds.
Recent data shows that, in January 2025, value funds attracted about ₹1,556 crore, a modest but meaningful rise from ₹1,514 crore in December 2024. Although still smaller compared to small- and midcap inflows, this steady inflow shows that investors are gradually rebalancing toward quality-oriented strategies.
This renewed interest in value funds isn’t surprising. With markets becoming more volatile and growth stocks trading at rich premiums, value strategies offer a defensive edge. They focus on companies with strong fundamentals that are temporarily out of favor, providing room for capital appreciation once the broader market realigns.
Why Are Investors Shifting Focus?
Relative Stability: With their bias towards established companies, value funds tend to be less volatile than smallcap and midcap funds.
Attractive Opportunities: Market corrections often unearth undervalued stocks, giving value fund managers more options to deploy capital effectively.
Diversification of Approach: For investors wary of overpaying for growth, value funds provide exposure to quality businesses without entering overheated segments.
This shift also aligns with broader trends of cautious investing, as geopolitical tensions and global economic uncertainty lead investors to prefer funds with a defensive tilt.
Should You Consider Value Funds for Your Portfolio?
While value funds may not deliver the explosive returns seen in smallcaps and midcaps during bull runs, they provide an important benefit: consistency across market cycles. Their focus on undervalued stocks offers downside protection in volatile markets, making them a suitable choice for:
- Investors with a moderate risk appetite.
- Those looking for long-term wealth creation without frequent portfolio churn.
- People seek a balance between growth and stability.
Patience is key to value investing. While these funds may underperform during bull markets driven by momentum stocks, their true strength lies in navigating volatility and delivering steady returns over time. For investors with a 5–7 year horizon, value funds can be a powerful tool for long-term wealth creation and consistent compounding.
Final Takeaway
As small and midcap funds begin to lose their momentum, value funds are stepping into the spotlight. Their focus on quality stocks at reasonable prices, coupled with consistent inflows, makes them an attractive option for investors seeking equity exposure with a measure of stability.
Before making any decisions, it’s crucial to compare mutual funds across categories to find the right fit for your risk appetite and long-term goals.
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