Strong inflows reduce redemption pressure, but concentration risks remain elevated
The stress levels in small-cap mutual fund schemes have declined to two-year low in July on the back of improved liquidity, even as fresh inflows have raised concerns over concentration risk.
As per the stress-test data released by AMFI, the average number of days required for small-cap funds to liquidate 50 per cent of their portfolios declined to 11 days in July against 15 days logged in same period last year, according to data from the Association of Mutual Funds in India (AMFI).
Over the past two years, the average time remained broadly stable at 16-18 days. More recently, liquidity has improved, with dilution days falling to 11 days in June 2026, even as AUM increased to ₹4.3 lakh crore indicating better market depth and liquidity in the segment.
AMFI calculates the stress levels of small-cap funds every month after excluding the bottom 20 per cent of the portfolio based on stock liquidity.
The growing appetite for the category is evident in its rising asset base. Inflows into small-cap funds in last one year rose 19 per cent to ₹59,438 crore, compared with ₹49,989 crore recorded in the same period previous year.
Small-cap fund AUM grew 24 per cent to ₹4.41 lakh crore in July 2026 from ₹3.56 lakh crore in July 2025, outpacing the 15 per cent rise in overall equity-oriented mutual fund AUM to ₹38.36 lakh crore (₹33.27 lakh crore) in last one year.
Small-cap schemes
Among the five largest small-cap schemes, Axis Small Cap and Nippon India Small Cap ranked best on liquidity, requiring just 15 days and 26 days, respectively, to liquidate 50 per cent of their portfolios in July, indicating a stronger ability to manage redemption pressures. Both funds also improved their stress-test metrics from April.
Hitesh Jain, Strategist, Institutional Equities Research, YES Securities, said while steady inflows have eased stress levels, concentration risk has increased, with only 37 per cent of Nifty SmallCap 250 stocks outperforming the benchmark this year, the lowest level in eight years, even as the Nifty SmallCap 250 has delivered the strongest returns among large, mid and small-cap indices.
While the AMFI liquidity-stress measure has improved, the breadth data points to a greater concentration of market returns, suggesting that incremental flows are potentially finding their way disproportionately into a smaller set of liquid and strong-performing small-cap stocks, he added.
However, active fund managers can reduce concentration risk by betting on stocks beyond the index constituents.
Vaibhav Chugh, CEO, Abakkus Mutual Fund, said the risk-reward equation for long-term investors in the small-cap space has improved due to valuation normalisation, resilient earnings, stronger balance sheets and a supportive domestic growth environment.
“We are seeing participation from domestic institutional investors, family offices, PMS and AIF platforms, as well as retail investors who continue to allocate capital to small-caps through direct equity investments,” he said.
Liquidity watch
While the small-cap universe is much wider, pockets of concentration do exist, particularly in stocks or themes that have attracted significant investor interest. It is important to monitor liquidity, business fundamentals and valuations at the individual stock level, he added.
Shweta Rajani, Head, Mutual Fund, Anand Rathi Wealth, said small-caps are fairly valued, though geopolitical tensions could create near-term market uncertainty. However, long-term returns will continue to be driven by fundamentals, earnings and the macroeconomic outlook.
She said that small-cap earnings rose 38 per cent year-on-year in the first quarter of FY27 despite geopolitical headwinds.
Aakanksha Shukla, AVP, Wealth Management, Master Capital Services, said strong inflows into small-cap funds have largely been routed through SIPs, enabling gradual deployment without hurting liquidity.
Broader market participation, lower volatility and prudent liquidity management by fund houses have further improved the segment’s liquidity profile, she said.
Published on August 23, 2026
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