New Delhi, March 24 : When it comes to returns, mid-cap and small-cap mutual funds have remained among the preferred choices for investors. Both categories have witnessed substantial growth over the past five years, with assets under management (AUM) rising sharply on the back of strong investor participation and sustained inflows, a report said on Tuesday.

A report by ICRA Analytics pointed out data from Association of Mutual Funds in India (AMFI), which showed that mid-cap funds posted a five-year CAGR of 32.41 per cent, with AUM increasing to Rs 4.62 lakh crore in February 2026 from Rs 1.13 lakh crore in February 2021. Small-cap funds outpaced this growth, registering a CAGR of 39.93 per cent, with AUM climbing to Rs 3.64 lakh crore from Rs 67,764 crore during the same period.

The segment has also seen a turnaround in investor flows. Mid-cap funds recorded net inflows of Rs 4,003 crore in February 2026, compared to a marginal outflow of Rs 99 crore in February 2021. Similarly, small-cap funds saw inflows of Rs 3,881 crore, reversing outflows of Rs 452 crore five years ago.

The report cautioned that near-term performance may remain volatile amid global uncertainties and foreign fund outflows from Indian equity markets.

â??Ongoing geopolitical tensions are also expected to weigh on investor sentiment, prompting a more cautious approach towards mid- and small-cap investments,â?? according to the rating agency.

Despite this, long-term returns across several schemes remain strong, with many funds delivering over 20 per cent compounded annual growth over five years, reflecting the segmentâ??s potential to generate wealth over time.

Experts suggest that disciplined investing through Systematic Investment Plans (SIPs) and a longer investment horizon can help investors navigate volatility and benefit from compounding.

Retail participation continues to remain strong, with SIP inflows rising nearly 14.79 per cent year-on-year to Rs 29,845 crore in February 2026, compared to Rs 25,999 crore in the same month last year which indicates sustained investor confidence in mutual funds.

/IANS