Indian small-cap funds are demonstrating a patient, long-term investment strategy, collectively managing an impressive ₹4.37 lakh crore. Fund managers are notably holding onto their stakes in newly listed smaller companies for extended periods, often well beyond the mandatory lock-in phase for Initial Public Offerings (IPOs).
Patient Approach to IPO Investments
A recent study by market regulator SEBI, analyzing approximately 242 IPOs launched between April 2022 and October 2025, highlights this trend. Domestic mutual funds have largely acted as patient anchor investors. Unlike their foreign counterparts, Foreign Portfolio Investors (FPIs), mutual funds have shown little urgency to exit their positions once the lock-in period concludes.
- Mutual funds sold an average of just 3% of their allotted shares after the 30-day lock-in period.
- Selling rose marginally to 7% by the 60th day and 15% by the 90th day.
- In over 100 IPOs, mutual funds did not sell any shares even after 30 days.
- For IPOs with a 365-day holding period, mutual funds sold only 38% of their allocations, significantly less than the 60% sold by FPIs.
This approach signifies a strategic shift, with fund managers focusing on the long-term potential of their investments rather than quick gains.
Reasons Behind the Strategy
Several factors contribute to this extended holding period by small-cap fund managers:
Confidence in Company Fundamentals
Fund managers typically invest in small and mid-cap companies with a long-term growth outlook. If a newly listed company continues to meet their fundamental and growth expectations, there is little incentive to sell.
Independent market analyst Ambareesh Baliga noted, “When mutual funds have more cash than good investment opportunities, there is little reason to sell profitable positions.” He added that selling also creates the need to identify another investment, making it preferable to remain invested in well-performing stocks.
Gaurav Kulshreshtha, Chief Investment Officer at NexAge Capital, echoed this sentiment, stating, “This is not about the availability of opportunities. They are making long-term bets in areas where they have the highest conviction.”
Market Performance and Asset Growth
The performance of smaller companies in the broader market has also reinforced this strategy. Over the past four years, small-cap funds have seen their Assets Under Management (AUM) grow at an annual rate of 42% to ₹4.37 lakh crore. In comparison, large-cap funds grew by 17% annually to ₹4.13 lakh crore during the same period.
Market indices further illustrate this trend: the Nifty Smallcap 250 index has risen 19% annually, while the Nifty 50 delivered 8% annualised growth over the same period. More recently, over the past eight months, the Nifty Smallcap 250 index gained 10%, contrasting with a 7% decline in the Nifty 50.
This sustained growth and outperformance provide compelling reasons for fund managers to maintain their positions, particularly when they believe in the underlying strength of their portfolio companies.