Mid-cap and small-cap mutual funds have outperformed: Why should investors favour large-caps at this stage?

Mutual fund investors have seen mid- and small-cap funds outperform large-cap funds, but valuations tell a different story. With large caps looking relatively attractive, should investors review their equity-fund allocation now?

Mutual fund investors often spread their equity allocation across large-, mid-, and small-cap funds to balance growth and risk. However, recent mutual fund flows, with stronger inflows into mid- and small-cap categories and outflows from large-cap funds, also reflect changing investor preferences.

In the last one year, large-cap funds delivered a category-average return of -4.76%, compared with 2.87% for mid-cap funds and 8.02% for small-cap funds.

An October 2026 Netra report from DSP Mutual Fund points to a sharp divergence between large caps and the mid- and small-cap segments, raising an important question about why investors should review their equity fund allocations at this stage.

Why should you prefer large-cap funds at this stage?

DSP Mutual Fund says the market is unusually polarised, with small and mid-caps trading at elevated valuations while several large-cap segments have undergone a significant correction. Over the past year, small and mid-caps have outperformed the Sensex by 21.5% and 14.1%, respectively.

The report noted that “Large caps have corrected enough for valuations to be near fair/cheap zones. SMIDs (small-cap and mid-caps) have seen less valuation compression and still need stronger earnings delivery to justify broad exposure. Large-caps may offer more opportunities at this time.”

For mutual fund investors, this means large-cap funds, which invest predominantly in established companies, could currently offer a relatively better margin of safety than mid- and small-caps. The report adds, “Barring the COVID decline, large caps haven’t been this attractive in over a decade.”