India’s mid-cap segment has lagged large caps in parts of 2025, prompting investors to reassess whether active management still adds value in a space that has become more regulated and widely tracked. Fund managers, however, argue that short-term underperformance does not dilute the structural case for active mid-cap investing.Deviprasad Nair, Head of Business for AIF and Mutual Funds at Helios India, said mid-caps continue to offer one of the most efficient grounds for active stock selection due to their position in India’s corporate growth cycle.“Mid-caps represent companies that have moved beyond early-stage fragility but still retain meaningful growth headroom,” Nair said. “This balance has historically enabled the segment to outperform both large and small caps over long periods.”
Unlike large caps, where mispricing windows tend to be narrow, or small caps, where survivorship risks are higher, the mid-cap universe benefits from continuous churn. Companies falling out of the top 100 are reassessed for sustainability, while new entrants from the small-cap space add depth to the opportunity set.Nair said this natural filtration allows active managers to focus on businesses with durable earnings and avoid structural losers.Regulatory framework still allows differentiationSEBI’s requirement that mid-cap funds allocate at least 65% of assets to companies ranked 101–250 by market capitalisation has narrowed the investible corridor, but Nair said it has not eliminated the scope for outperformance.“The 101–250 universe spans a wide range of business models and balance-sheet profiles,” he said. “Market capitalisation alone does not capture execution quality, governance standards or cash-flow resilience, which remain critical differentiators.”He added that the remaining 35% allocation enables portfolio positioning across market cycles, whether through emerging small caps with upgrade potential or selective large-cap exposure to moderate risk.
Research depth remains a source of alphaDespite broader analyst coverage, Nair said many mid-cap stocks continue to be driven by short-term narratives and exaggerated reactions to quarterly results. This, he noted, creates opportunities for managers with deeper research processes focused on industry structure, earnings durability and valuation discipline.“Our experience at Helios shows that once weak balance sheets, fragile business models and valuation excesses are eliminated, the investible universe becomes far more efficient,” he said. “Differentiation comes from discipline, not deviation.”Recent performance reflects valuation reset, not structural weaknessMid-caps have underperformed large caps on a calendar year-to-date basis in 2025, with the Nifty Midcap 150 TRI delivering lower returns than the Nifty 50 TRI, according to Morningstar data.However, on a financial year-to-date basis, mid-caps have outpaced large caps, indicating that the recent weakness has been uneven rather than systemic.Nair attributed the divergence partly to valuation normalisation. “Mid-caps typically trade at higher growth premia. When earnings delivery falls short, valuations correct,” he said. He also pointed to the recent global underperformance of the Quality factor as an additional headwind.Over longer horizons, however, mid-caps continue to outperform. Data shows the Nifty Midcap 150 TRI has delivered significantly higher returns than both the Nifty 50 and Nifty 500 over five-, ten- and fifteen-year periods.“This long-term edge comes from the structure of the mid-cap universe itself, which consistently captures companies at inflection points in their growth trajectory,” Nair said.For long-term investors, Nair emphasised that manager consistency matters. “Performance dispersion in active mid-cap funds widens over time. That makes investment philosophy, process discipline and team stability far more important than short-term performance cycles,” he said.
