Why Emkay Is Betting On Small And Mid Caps

Current macros and valuations support small and mid caps as India's growth story is set to broaden beyond large caps, according to Emkay.

Small and midcaps offer broader exposure to India’s growth story through innovation, digitalisation, capex, and consumption, providing more opportunities for alpha generation compared to large caps, said the financial services company, at the launch of its SMID Cap Growth Engine Fund. As such, they are expected to see positive growth over next 3-5 years, making them a good bet for investing.

These sectors are likely to benefit from macro tailwinds such as easing inflation, declining interest rates, rising household income boosting consumption, and liquidity measures supporting market revival translating into higher growth, said Manish Sonthalia, chief investment officer of Emkay Investment Managers.

Given that SMID companies tend to rely more on borrowing for their operations and growth, their higher sensitivity to interest rate cycles positions them to revive and potentially outperform in an environment of easing retail inflation and declining rates, Emkay said.

As of March 2025, small-cap and mid-cap mutual funds together constitute over ~30% of total equity flows, a significant jump from ~5% a year ago. The dual support from foreign institutional investors and mutual funds makes this rally much more sustainable. Strengthening flows into SMID segments suggest that select opportunities in small and mid-cap stocks could outperform over the medium term.