Why midcap and smallcap funds are pulling in cash again

"The fear of a correction has faded," said Rupesh Bhansali, head of mutual funds at GEPL Capital. "Investors who sat on cash in January are now chasing performance."

Sectoral data shows the bulk of the buying went into banking, financial services, and IT midcaps – sectors that had lagged the broader rally in largecaps through late last year. Fund managers have been rotating into these names on expectations that earnings growth will broaden beyond the top 10 companies by market cap.

Systematic investment plan flows into midcap and smallcap funds also hit a record ₹11,200 crore in February, suggesting retail investors are sticking with monthly commitments even as lump-sum allocations fluctuate.

The turnaround comes ahead of the March quarter earnings season, where analysts expect midcap and smallcap companies to post revenue growth of 14-16% year-on-year, faster than the Nifty 50's estimated 8-10% pace.