Mutual fund, SIP investment: Large-cap vs small-cap — Where to invest new money this Diwali, Dhanteras? Experts views

As people receive bonuses or look to invest more around Diwali, two mutual fund categories are locked in a tug-of-war: large-cap and small-cap funds.

According to AMFI data, large-cap funds received inflows of around ₹859 crore in September 2026 after witnessing outflows in July and August. Meanwhile, small-cap funds continued to lead in inflows and attracted around ₹9,039 crore, accounting for 23.6% of total equity mutual fund inflows in September.

The year-to-date returns present a contrasting picture. Large-cap funds posted negative category average returns of -9.19%, while small-cap funds returned 6.87% as of 21 October 2026, according to Morningstar data.

However, valuations tell a different story. Under SEBI’s mutual fund categorisation rules, large-cap funds must invest at least 80% of their assets in large-cap stocks, while small-cap funds must invest at least 65% in small-cap stocks. Consequently, the performance of the underlying market segments has a material impact on fund returns.

The key benchmarks reflect the valuation gap. The Nifty 100 (large-cap benchmark) is trading at a price-to-earnings (PE) ratio of 18.9, below its one-year average of 20.8. In contrast, the Nifty Smallcap 250, the benchmark for the small-cap segment, is trading at a PE ratio of 32.5, above its one-year average of 30.7, according to Trendlyne data on 22 October.

This puts large-cap funds in a relatively attractive position from a valuation perspective, while small-cap funds lead in recent returns and inflows. Where should investors deploy fresh money this Diwali 2026? Here’s what experts suggest.

Where should you invest fresh money: Large-cap or small-cap funds?

Vedant Gupte, Co-Founder and CEO of investment platform Trackk, said investors should prioritise valuations and consider large-cap funds rather than chasing recent performance.

“Chase the story, and you’ll pick small-caps. Chase the price, and you’ll pick large-caps. This Diwali, price should lead. When everyone is crowded into one category, new money should walk the other way. Large-caps are the quiet bargain, and small-caps are the loud one,” he added.

However, Manish Srivastava, Executive Director, Anand Rathi Wealth, has a different view on investing fresh money this Diwali. He recommends diversification across market capitalisations, including large-, mid-, and small-cap funds, as well as strategy-based funds such as value, focused, and dividend-yield funds.

He suggested a 55:23:22 allocation across large-, mid-, and small-cap funds through active diversified equity schemes to navigate market cycles.

What factors should guide your investment decision?

Gupte said investors should consider four factors before investing:

• Investment horizon: If you need the money within five years, avoid small-cap funds.
• Risk appetite: Assess whether you can withstand a sharp fall of up to a third in your investment without panic-selling.
• Portfolio allocation: Build the core of your portfolio with large-cap or index funds, adding small-cap funds as a smaller, supplementary allocation.
• Valuations: Use valuations to determine how much to invest in a category, rather than whether to invest at all.

However, Srivastava said investment decisions should be driven by one’s investment objective and their horizon, as these factors help identify liquidity requirements and asset allocation.

What should first-time mutual fund investors choose this Diwali?

Gupte favoured large-cap funds through a systematic investment plan (SIP) for first-time investors. “A first investment shouldn’t test your nerves; it should build the habit. A bad first year in small-caps can turn a new investor off markets for a decade, and that’s the real cost,” he said.

However, Srivastava suggested that investors with small SIPs of around ₹1,000 to ₹2,000 per month could consider multi-asset allocation or hybrid funds.

How do large- and small-cap funds’ risk-return profiles differ?

Srivastava said large-cap funds tend to be relatively less volatile during market uncertainty, given the size and established businesses of their underlying companies. Small-cap funds offer greater potential for long-term earnings growth but come with higher volatility, sharper drawdowns, and greater sensitivity to market cycles.

Gupte expects large-caps to regain investor attention as earnings growth supports performance, while small-cap returns are likely to depend more on individual stock selection than broad-based index gains. “The smart question isn’t which category wins; it’s which one lets you stay invested,” he added.