How Mutual Funds Are Tapping the MSME Growth Story

In 2025, India’s midcap mutual funds are no longer just about returns—they’ve become a lens through which the country’s economic ambition and entrepreneurial rise can be viewed. With strong participation from domestic investors and robust performance metrics, these funds are gaining attention for capturing the journey of Indian businesses as they scale up from MSMEs to market leaders.

Midcap mutual funds, which primarily invest in companies ranked 101st to 250th by market capitalisation, sit squarely between largecaps and smallcaps in the risk-return spectrum. But what makes them particularly exciting today is not just the performance—they’re becoming a structural growth story. And that’s a story deeply connected to India’s micro, small and medium enterprises (MSMEs).

The MSME-Midcap Connection

India’s MSME ecosystem is among the world’s most vibrant. From family-run businesses and local manufacturers to export-oriented units and digital-first brands, many of today’s midcap giants were once MSMEs navigating the same challenges—limited capital, talent gaps, and market access.

As these companies scale up—powered by reforms, formalisation, and rising domestic consumption—they graduate into the midcap universe. Investors in midcap mutual funds are, in a way, backing the most successful alumni of India’s MSME sector.

This makes midcap mutual funds not just investment vehicles, but economic narratives that trace the evolution of Indian entrepreneurship.

Why 2025 Is a Pivotal Year for Midcaps

The divergence between midcaps and other categories has widened significantly in recent years. The Nifty Midcap 150 TRI has outpaced both large-cap and small-cap indices, delivering over 21% returns in 2025 alone.

This isn’t a short-term trend. Since the pandemic, midcaps have benefited from:

• The Make-in-India push that boosted domestic manufacturing

• Formalisation through GST, digital taxation, and regulatory streamlining

• Strong earnings from companies in healthcare, IT services, engineering, and consumption-driven sectors

The result? Midcaps are no longer cyclical bets. They're now being viewed as long-term, secular growth opportunities, built on the backbone of MSMEs that survived, scaled, and thrived.

Mutual Funds Riding the Midcap Wave

Let’s take a closer look at five standout midcap mutual funds that are strategically positioned to capture India’s growth over the next decade. What sets them apart is not just their returns, but their alignment with core sectors driving MSME transformation.

Motilal Oswal Midcap Fund

Known for its focused approach, this fund has consistently invested in scalable businesses with long runways for growth. With a 10-year CAGR of 20.50%, its portfolio includes companies like Coforge and Trent—once mid-sized outfits, now industry leaders. The fund’s concentrated exposure to IT and domestic consumption reflects confidence in India's digital and consumer economy, both of which are fertile ground for MSMEs.

Edelweiss Mid Cap Fund

With a diversified portfolio and emphasis on earnings visibility, Edelweiss has shown how bottom-up investing can deliver alpha. Many of its holdings—such as Persistent Systems and Max Healthcare—are companies that made their mark by solving uniquely Indian challenges at scale. These are firms that began with modest roots and scaled through innovation, not just capital infusion.

Kotak Mid Cap Fund

With one of the largest AUMs in the midcap space, Kotak’s fund showcases disciplined investing in structural growth stories. By staying away from speculative bets and focusing on capital-efficient businesses, it mirrors the ethos of sustainable MSME growth.

Invesco India Mid Cap Fund

This fund’s preference for companies with strong balance sheets and governance reflects a trend seen in modern MSMEs that are evolving from unorganised setups into formal, tax-compliant and scalable businesses. BSE and L&T Finance—two of its major holdings—are both examples of how mid-sized firms are aligning with India’s changing financial architecture.

HDFC Mid Cap Fund

A long-time favourite among conservative investors, HDFC’s fund has a reputation for resilience. With a cautious yet quality-oriented approach, it captures companies like Max Financial and Federal Bank—firms that were once in the shadows of larger institutions but have now carved out significant market share.

What This Means for MSME Stakeholders

For MSME promoters, employees, or ecosystem players, this trend offers inspiration and insight. The transition from SME to midcap is not just aspirational—it’s happening all around.

These funds effectively map India’s entrepreneurial success stories. They show what’s possible when MSMEs invest in quality, formalise operations, adopt digital tools, and plan for the long haul.

Moreover, midcap mutual funds can be a smart wealth-building option for MSME owners looking to diversify their personal or business capital into equity markets, without getting into stock picking themselves.

Final Word: Invest in India’s Growth Story

Midcap mutual funds are not just outperforming—they're embodying the rise of Indian business. As India marches into a decade of infrastructure expansion, digital innovation, and local manufacturing, these funds offer a powerful way to participate in that journey.

For the MSME audience, it’s more than an investment—it’s recognition. Recognition that the businesses they are building today could be the same ones powering India’s midcap boom tomorrow.