Midcap and smallcap mutual funds have delivered widely divergent returns this year, with some strategies outperforming decisively while others have struggled to keep pace with shifting market cycles. In an interview with CNBC-TV18, Nirav R. Karkera, Head of Research at Fisdom, broke down what is driving this dispersion and what investors should note when evaluating these categories.
Karkera began with the Invesco India Mid Cap Fund, which has delivered one-year returns of about 14%, significantly ahead of the midcap index. He said the fund first drew their attention last year because it stays “true to label.”
Unlike many midcap schemes that also add largecaps, this one remains strictly in the midcap space and follows a pure bottom-up stock-picking approach rather than theme- or sector-driven calls.
Its ability to identify opportunities early in financials, real estate, industrials and defence has supported returns, with stocks such as L&T Finance, AU Small Finance Bank, Godrej Properties and Bharat Dynamics contributing meaningfully.
He then discussed the Motilal Oswal Midcap Fund, which has underperformed this year despite a strong three-year CAGR of around 25%. Karkera attributed this to its high-conviction, concentrated strategy — an approach that can deliver outsized gains in supportive cycles but may lag when underlying themes face headwinds. In 2025, areas such as premium consumption, engineering services and midcap IT have been weak, pulling down performance. However, he said the fund could rebound over the medium term when market conditions turn favourable.
Among smallcap funds, Karkera highlighted the Invesco Small Cap Fund as a consistent outperformer. He said the fund relies on deep research and bottom-up stock selection across a diversified portfolio, with notable winners in capital markets, infrastructure and hospital-related businesses. The strategy emphasises valuation comfort and earnings visibility.
Finally, he addressed the challenges facing the DSP Nifty Small Cap Quality 50 Index Fund, which is down about 12% this year. As a passive, rule-based fund that focuses solely on the “quality” factor, it lacks the flexibility active managers enjoy. Karkera noted that for such a strategy to work, the quality theme must perform broadly across the smallcap universe — something that has not played out in the current market environment.
For the entire discussion, watch the accompanying video