Midcap and smallcap funds have seen a big run-up over the last few months. Investors can be seen flocking to these spaces while moving out of largecap funds. However, experts feel that the size of midcap space is reducing and investors can find some comfort in smallcap valuations. This is because too much money is chasing too many stocks in the midcap space, Chandraprakash Padiyar, senior fund manager at Tata Asset Management, said while talking to CNBC-TV18.

"When we look at all the names in the space, the market expectations are 50-80 percent of earnings growth in more than two years. This expectation is very high, so the valuation is also moving forward," Padiyar said.

On smallcap funds, he, however, feels that there is an opportunity as there is better earnings growth.

What the data tells about flows?

The recent Association of Mutual Funds in India (AMFI) data showed that of the total net flow of Rs 1.46 lakh crore into equity-oriented schemes, 15.1 percent or Rs 22,104 crore was invested in small-cap funds in FY23. This trend continued in FY24 (April and May) when of the total net flow of Rs 9,721 crore, a net flow of Rs 5,465 crore was into small-cap funds.

Similarly, the spread over midcap funds has been maintained in FY23. In May, the category witnessed inflows of Rs 1,196 crore. Both indices are also performing well. While the Nifty small cap is 9 percent up since January 1, the Nifty midcap index is around 11 percent up.

The returns

Small-cap funds have delivered 10 percent return on a year-to-date (YTD) basis, an 11.5 percent return on a three-month basis, and a 24.4 percent return on a one-year basis.

Here's a look at some of the fund and their returns:

On the midcap side, the category rose by 1.15 percent in FY23. Categories like midcap IT, new-age tech, hospitals, midcap banks and luxury consumption categories, including hotels, have done very well.

Here's a look at some of the best-performing midcap funds:

Investment opportunity

As per Padiyar, there is interest in pharma and healthcare space including hospitals. He added that he likes manufacturing as a theme.

On the other hand, ICICI Prudential AMC's Anand Shah sees opportunities in the manufacturing space in terms of valuation as well. He said he likes financials and believes that earnings growth will sustain and will be reasonably priced.