The Supply-Demand Interplay

The price of any commodity, including gold, is ultimately shaped by the balance between supply and demand forces.

At first glance, it might seem straightforward: in times of economic or geopolitical instability, demand for gold should surge and surpass available supply, while in periods of relative stability, demand would naturally ease, allowing supply to dominate.

However, the reality is often more nuanced. By closely examining recent market data, investor behavior, and broader macro-economic trends, we can uncover deeper insights into how strongly this assumption holds up and whether gold truly behaves in line with these conventional expectations.

The Gold Demand - What drives it?

Over the period from 2010 to 2024, the global supply of gold has remained relatively stable. This consistency is attributed to steady mine production and a smaller, but consistent, contribution from recycled gold.

Gold supply has also shown only a little change even in response to fluctuations in its market price.

Opposite to that, fluctuations in gold demand have been the primary driver of its price changes.

• Investment Demand

• Central Bank Purchases

• Jewellery and Technology Demand

The gold market is defined by a relatively stable and limited supply.

Demand, however, is significantly moved by global stability and current economic sentiments.

As a result, gold’s long-term price reflects its dual nature as both a physical commodity and a reliable financial asset, especially during times of global uncertainty.

Gold Production - Trends from 2010-2024

Over the past 15 years, global gold mining has exhibited a pattern of stability at the top of the producer rankings, while experiencing shifts among lower-ranked nations. Analyzing these long-term trends from 2010 to 2024 provides a clearer picture of the world’s gold-producing landscape.

Leading Producers:

China has consistently held the position of the world’s largest gold producer throughout the entire 2010 to 2024 period. Its production increased from 351 tonnes in 2010 to over 380 tonnes in 2024, maintaining an undisputed Rank 1.

Australia and Russia have consistently occupied the 2nd and 3rd positions, respectively, with their production levels often closely compared with each other.

Australia’s output peaked around 2019, followed by a moderate decline.

Ranking Shifts:

South Africa, which was a top 5 producer in 2010, exited the top tier by 2012 and has not re-entered it since.

The US has experienced a steady decline in its gold output, falling from 231 tonnes in 2010 to just 158 tonnes in 2024, gradually affecting its position in the global rankings.

Opposite to that, Canada has moved in an upward trajectory. Starting outside the top 5 in 2010, Canada gradually increased its production and became a consistent top-5 producer from 2016 onwards.

Stability and Volatility:

While the top 3 producers (China, Australia, and Russia) have demonstrated significant consistency in their output, positions 4 and 5 have shown greater volatility, with Canada and the US frequently rotating these spots based on short-term production trends.

Collectively, the top 5 gold-producing countries continue to dominate global production, highlighting a concentrated supply base.

Gold Reserves (2010-2024)

Do the countries producing the most gold also hold the most in their reserves?

The top 10 countries in gold reserve rankings have largely maintained their presence over the last 15 years, primarily experiencing shifts in their specific positions rather than a change in the composition of the top tier.

The US has consistently held the top spot in gold reserves, followed by Germany, Italy, and France.

China and Russia have shown the most significant movements. China steadily climbed the ranks, surpassing Switzerland and Russia to stand at 5th place. Russia also saw a rise between 2013 and 2019 but was later overtaken by China.

India improved its position from 10th to 8th over these years.

Russia showed a substantial growth in its gold reserves, with an impressive increase of 195.8% over the 15-year period, followed by China and India.

To Sum Up

From January 2024 to mid-2025, gold prices didn’t just move up by chance. They climbed steadily on the back of some powerful global forces. Geopolitical tensions created uncertainty, central bank policies shaped liquidity, and persistent inflation pushed investors to look for safety.

Add to that the ongoing trend of de-dollarization, and gold naturally found itself in the spotlight as a reliable store of value.

What’s interesting is that supply has remained relatively stable, while central banks, especially in emerging economies, kept buying consistently.

At the same time, investor sentiment swung back and forth, which added to the price fluctuations. On the production side, China, Australia, and Russia continued to dominate as the world’s largest suppliers, anchoring the physical side of the market.

All of this reinforces gold’s unique role. It’s not just another shiny metal.

It’s both a commodity with tangible supply & demand dynamics and a financial hedge that people turn to when the world feels uncertain.

In today’s climate, gold is less about short-term speculation and more about long-term confidence, acting like a barometer of how secure, or insecure, the global system feels at any given moment.

Read Part 3

Read Part 2

Read Part 1

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.

2000s - 2011

2000s-2011 saw a new gold bull run.

Gold entered the 2000s at relatively low levels. In 2001, the annual average price was around $270 per ounce. From this base, it began a steady climb. By mid-2006, gold had crossed $600 per ounce, with an annual average of $603 in 2006 and $695 in 2007.

The real acceleration came after the 2008 global financial crisis. By late 2010, gold had surged above $1,300 per ounce. The annual average for 2010 was $1,224 per ounce, and by December 2010 it was averaging over $1,400 per ounce.

This rally peaked in August–September 2011, when gold reached its all-time nominal high of $1,921.11 per ounce on September 6, 2011.

Main Driver: Global financial crisis and geopolitical turmoil (safe-haven demand)

Followed by: Ultra-loose monetary policy, inflation fears, and the early phase of renewed de-dollarization.

Crisis Sparks Flight to Gold

The U.S. stock market crashed badly during the 2008 financial crisis, falling almost 57 percent from its October 2007 peak to its lowest point in March 2009. The U.S. economy also shrank sharply, with GDP contracting by 4.3 percent from late 2007 to mid-2009.

Fear in the market was extreme. The VIX index, which measures volatility spiked to 80.86 in November 2008. It was one of the highest readings ever recorded.

The panic deepened when Lehman Brothers went bankrupt on September 15, 2008, followed by the Federal Reserve’s $85 billion bailout of AIG just a day later. These events made investors worry about a total collapse of the financial system.

In this fear, investors rushed to safe-haven assets, and gold became their top choice. This wave of fear-driven demand was the initial spark that sent gold prices climbing.

Ultra-loose monetary policy (interest rate cuts + money printing)

In this crisis time, to save the system, the U.S. Federal Reserve (and other central banks) slashed interest rates to 0% and began quantitative easing (QE) — printing trillions of dollars to buy bonds and inject liquidity. With interest rates at zero and inflation expectations starting to rise, real interest rates turned negative, making cash and bonds unattractive.

This made gold even more appealing. It doesn’t pay interest, but now neither did anything else — and gold wasn’t being printed. As a result, more investors jumped to buy gold, pushing prices even higher. The Federal Reserve aggressively cut the Federal Funds Rate from 4.75% in September 2007 to a target range of 0-0.25% by December 2008, where it remained for years.

To save the system, the U.S. Federal Reserve (and other central banks) slashed interest rates to 0% and began quantitative easing (QE) — printing trillions of dollars to buy bonds and inject liquidity. With interest rates at zero and inflation expectations starting to rise, real interest rates turned negative, making cash and bonds unattractive.

This made gold even more appealing. It doesn’t pay interest, but now neither did anything else — and gold wasn’t being printed. The result: more investors piled into gold, pushing prices even higher.

Quantifying Monetary Easing:

To prevent a total collapse of the financial system, the U.S. Federal Reserve and other central banks cut interest rates to 0% and launched quantitative easing (QE) — creating trillions of dollars to buy bonds and stabilize markets.

The Federal Funds Rate fell from 4.75% in September 2007 to a target range of 0–0.25% by December 2008, where it stayed for years.

It was historic. The Federal Reserve’s balance sheet, which had been under $1 trillion for decades, expanded to more than $2.8 trillion by late 2011. This massive injection of liquidity pushed interest rates lower across the economy and made borrowing cheaper.

But it also had a side effect. With interest rates at zero and inflation expectations starting to rise, real interest rates turned negative. This meant holding cash or bonds resulted in a loss of purchasing power over time.

Gold suddenly became far more attractive. It does not pay interest, but in an environment where cash and bonds also paid almost nothing, gold offered protection against currency debasement. Investors around the world responded by pouring money into gold, driving prices higher.

Inflation fears + De-dollarization trend

Even though inflation in developed countries stayed around 2–3%, people feared it would rise because of all the money printing during the 2008 crisis. In emerging markets like India, China, and Brazil, rising commodity prices added to these fears.

At the same time, trust in the U.S. financial system weakened. Countries like China, Russia, and India started buying gold and cutting their dependence on the dollar.

Central banks, which had been selling gold for decades, became net buyers in 2010 — purchasing over 70 tonnes that year and more than 450 tonnes by 2011.

Investors also rushed to gold ETFs like SPDR Gold Shares (GLD), whose holdings nearly doubled from 700 tonnes in 2008 to over 1,300 tonnes in 2009 and peaked above 1,600 tonnes by 2011.

The U.S. Dollar Index fell from 88 in 2009 to below 73 in 2011, making gold cheaper globally and further boosting demand. Just like in the 1930s and the 1970s, the core driver of 2008 gold rally was the same. The root cause remained a loss of faith in the system and a search for safety. Gold once again became the preferred asset when trust in paper money was under question.

Read Part 2

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.

Core Drivers of Gold (Historical Context)

Gold Cycles - A look into the history

Over the last century, gold has gone through several major price surges—often followed by periods of correction or stability. They’ve never been random and have almost always been triggered by a mix of four key factors, like we discussed earlier.

• Geopolitical stress

• Changes in monetary policy (especially interest rate shifts),

• Sticky or rising inflation

• De-dollarization— when countries move away from the US dollar and add more gold to their reserves.

These factors often overlap, but they don’t always act at the same time or with the same intensity.

In some periods, one of them clearly takes the lead, becoming the primary reason behind the rally — while the others play a supporting role.

Let’s look at specific time periods in history where gold prices surged. For each one, we’ll identify what triggered the move first, and how the other drivers followed.

Understanding this sequence not only explains the past — it also gives us a clearer image through which we can try to understand what might come next.

Early 1930s: The Great Depression

This was the first time gold saw a price surge in modern history; before this, gold was used as a standard.

The Great Depression began in 1929 and caused a massive economic crisis and global uncertainty. Industrial production plummeted by nearly 47% from 1929 to 1933, and the Dow Jones Industrial Average collapsed by almost 89% from its September 1929 peak (381.17) to its July 1932 low (41.22), wiping out large amounts of wealth in the economy and shattering public confidence.

As fear spread, people and investors started hoarding gold because it felt like a safe place to store their money. At the time, the U.S. was still on the gold standard, with the dollar officially pegged at $20.67 per ounce of gold. But this gold peg made things worse.

Because the dollar was tied to gold, the government couldn’t freely print more money or run big fiscal deficits to boost the economy. Prices began to fall sharply as a result.

The U.S. experienced severe deflation — the Consumer Price Index (CPI) dropped by 8.9% in 1931 and another 10.3% in 1932.

This growing distrust in the financial system led to a banking crisis, with nearly 9,000 out of 25,000 U.S. banks failing between 1930 and 1933. As the banking system collapsed and deflation deepened, the gold standard became unsustainable.

So, in 1933, President Franklin D. Roosevelt took a bold step. He ended the gold standard, banned private ownership of gold, and devalued the U.S. dollar by raising the official gold price from $20.67 to $35/oz.

This effectively made the dollar worth nearly 65% less compared to gold.

Which meant, in practice, each dollar bought significantly less gold. This allowed the government to expand the money supply, fight deflation, and support the economy during the Great Depression.

The main driver was the geopolitical and economic crisis of the Great Depression, which forced a major monetary shift. The U.S. broke the dollar’s tie to gold and devalued its currency.

Here’s how it played out: first came the Depression itself with the crash, mass unemployment, and industrial collapse. This led to the policy response. The U.S. ended the gold peg, cut interest rates, and allowed the dollar to lose value. As a result, gold prices moved sharply higher.

Soon after, other countries began to follow by abandoning their own gold pegs or devaluing their currencies. This sped up the global move away from a single gold-backed system

Main Driver: Economic crisis and currency policy change (end of the gold standard).

Followed by: Intentional currency devaluation (inflation) and the early phase of de-dollarization, as each country started running its own monetary policy.

Now let us look at the details of the sequence that cause the gold surge in the 1930s.

1. Interest Rate / Currency Policy Shift – Breaking from Gold:
   
   At the time, the U.S. was stuck on the gold standard: each dollar was backed by gold, limiting how much money the government could print. This made it impossible to stimulate the economy — no room for deficit spending or monetary expansion. In 1933, President Roosevelt ended domestic gold convertibility — citizens could no longer exchange dollars for gold or legally own it in large amounts. Then in 1934, the U.S. officially raised the price of gold from $20.67 to $35 per ounce — a 67% dollar devaluation. This allowed the government to print more dollars per ounce of gold, injecting more money into the economy. This was the turning point — it marked a clear policy break from past orthodoxy, giving rise to modern fiat monetary tools.

2. Sticky or Rising Inflation— but not by accident:

   
   After the dollar was devalued, the U.S. moved from deflation to mild, controlled inflation. The goal was to stop the price crash, encourage people to spend again, and restart economic activity. This was intentional reflation where policymakers wanted prices to rise just enough to bring wages and profits back up. Inflation was not yet a threat, but it was crucial for restoring confidence that growth could return. So while inflation was not the initial trigger, it was an important outcome that supported higher gold prices and a more flexible monetary environment.

   

3. De-dollarization (Early Phase):
   

   Once the U.S. abandoned the gold peg and devalued the dollar, other countries soon followed. The British pound had already left the gold peg in 1931 which initially made it weaker against the dollar. After the U.S. devaluation, the dollar’s value against the pound saw a significant shift. Other countries quickly followed. This marked the first true wave of global monetary divergence — where countries began to run independent monetary policies, not tied to gold or to each other. It wasn’t about rejecting the dollar yet, but it broke the shared gold standard system that had governed trade and currencies. This was the earliest version of de-dollarization: a move away from globally coordinated, gold-based money toward national control.

   ---

Timeline of Currency Devaluations During the Great Depression:

1970s–1980: Stagflation and Bretton Woods Collapse

The 1970s saw one of gold’s most dramatic bull markets.

Before 1971, gold was fixed at $35 per ounce. You could not freely buy or sell it since the U.S. government controlled the price because the dollar was tied to gold.

In 1971, the U.S. ended the Bretton Woods system (August 15, 1971, known as the “Nixon Shock”). After this, the dollar was no longer backed by gold, and gold was allowed to trade freely.

Around the same time, the U.S. faced stagflation, a rare and challenging combination of high inflation and high unemployment. Inflation hit double digits.

People lost faith in paper money like the U.S. dollar because it kept losing value. Gold, on the other hand, felt safer and more reliable.

As more and more people started buying gold, its price shot up fast.

It went from about $44.60 in 1971, after the peg was removed, to around $230 in early 1979. Then, within just a year, it soared to nearly $850 by January 1980.

The highest point came on January 21, 1980, at $850 per ounce — more than tripling in price, a massive 269% jump in such a short time.

Main Driver: Soaring inflation (stagflation) after the end of the gold-standard regime

Followed by: Geopolitical turmoil and a loss of confidence in the U.S. dollar (early de-dollarization trend).

Inflation and the End of the Gold Standard:

The U.S. printed too much money in the 1960s, with big government spending on the Vietnam War and social welfare programs without raising taxes. The economy was quietly slipping into an inflationary phase even before Bretton Woods collapsed.

In 1971, the U.S. ended the gold-dollar link (Bretton Woods System). The dollar was no longer backed by gold, allowing it to float freely and leading to its devaluation in the open market. This made people fear that the dollar’s purchasing power would keep falling

For context, the U.S. CPI (inflation rate) soared from 4.3 percent in 1971 to peak at 11.1 percent in 1974 and again at 13.5 percent in 1980. Concurrently, the unemployment rate climbed to 8.5 percent in 1975 and reached 7.8 percent in 1980, demonstrating the stagnation alongside inflation.

Real GDP growth was also volatile, with recessions in 1973–75 and 1980.

This combination of a broken monetary system and runaway inflation triggered a massive loss of confidence in paper money, and people turned to gold as a hedge. The breaking of the gold-dollar link and the onset of double-digit inflation formed the core reasons behind the 1970s gold boom.

Geopolitical turmoil:

During the 1970s, the world went through a series of major political and military crises that made investors even more nervous and pushed them toward gold.

• 1973 Yom Kippur War (October 6–25, 1973): This war in the Middle East led OPEC countries to stop exporting oil to several Western nations. As a result, oil prices (WTI crude) jumped from about $3.50 per barrel to more than $12 per barrel by early 1974 — almost a 300 percent rise.

• 1979 Iranian Revolution (February 1979): The revolution in Iran caused major disruptions to oil supply. Oil prices climbed again, doubling from about $15 per barrel at the start of 1979 to more than $30 by the end of the year. They eventually peaked above $40 per barrel in 1980.

• Soviet Invasion of Afghanistan (December 24, 1979): The Soviet Union’s military action increased Cold War tensions and made the global situation even more unstable. Each of these events created fear and uncertainty for investors.

Gold, which has long been considered a safe place to store value during times of crisis, became even more attractive.

This meant that beyond inflation, the geopolitical chaos of the 1970s gave investors a strong additional reason to buy gold.

Trust in U.S. Dollar Erodes (Early De-Dollarization):

By the late 1970s, the U.S. dollar had weakened dramatically. The combination of high inflation, two oil shocks, and the end of the gold standard had shaken faith in the currency

In 1978–79, the situation became so serious that it was referred to as a “dollar crisis.” Investors were losing confidence in the dollar’s ability to hold its value. To attract foreign investors, the U.S. had to issue bonds in other currencies, known as Carter bonds.

For context, the Trade Weighted U.S. Dollar Index, which tracks the dollar’s value against a basket of major trading partners, fell by more than 20% compared to its 1971 level. It hit a low point of about 81.16 in October 1978 — one of the weakest levels for the dollar in that era.

This weakness did not go unnoticed internationally. Many countries, including oil-rich nations, began to diversify their reserves. Instead of holding only U.S. dollars, they started buying more gold, seeing it as a neutral and safer store of value.

This marked the early phase of de-dollarization. It was not a total rejection of the dollar, but it clearly showed a loss of trust in its long-term stability. Gold once again became the preferred choice for central banks and investors seeking monetary safety.

1970s followed the same core pattern seen in earlier periods. A major monetary shift, the end of the gold standard, combined with soaring inflation, geopolitical crises, and a weakening dollar to create the perfect conditions for gold to surge

.

Read Part 1

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.

Gold Price Movement

Gold has experienced an extraordinary bull market, demonstrating one of its most significant surges in recent history.

The price of gold escalated from $2,063.73 to $3,343.44 within a mere 18 months period, reflecting an impressive +62% rise.

This substantial appreciation underscores gold’s robust performance in the current economic climate.

In comparison to other major asset classes, gold emerged as a top performer during this tumultuous period.

Its a 62% rise significantly outperformed other asset classes like equities, bonds, and crude oil.

While this rise is seen in terms of USD/Oz, the graph below shows this surge in INR/gram. With respect to the Indian markets, it has shown a jump of nearly 52% during the same period.

Key Performance Drivers

Several critical factors converged to propel gold’s recent rally.

• Geopolitical Risk: Heightened market volatility, fueled by on going tensions such as the Russia-Ukraine conflict, instability in the Middle East, and trade disputes between the US and China, significantly increased demand for gold as a safe-haven asset.

• Federal Reserve Policy Changes: The Federal Reserve’s strategic interest rate cuts, totaling 100 basis points (bps) in 2024, created a more favorable environment for gold. Lower interest rates typically reduce the opportunity cost of holding non-yielding assets like gold, making it more attractive to investors. A similar behaviour can be seen in the decisions of the RBI in India. The central bank’s interest rate has either remained unchanged or have been reduced, pushing the demand upwards for gold.

  

  

• Inflationary Pressures: Persistent inflation rates, with core inflation hovering around 2.8%, sustained high demand for gold. Investors view gold as a reliable hedge against the reducing purchasing power caused by inflation. In the Indian markets, while the inflation rates went down in the first half of 2025, they remained at a higher scale for the almost the entire 2024.

• De-dollarization Trend: A subtle global shift away from holding US dollar-denominated reserves, particularly in major economies like China and Russia, has intensified the demand for gold as an alternative reserve asset.

Broader trends affecting Gold

The recent surge in gold prices reinforces its established status as a long-term hedge during periods of uncertainty.

Historical analysis reveals a strong correlation between gold’s performance and global financial crises, as well as increased geopolitical stress, shown by its price movements during 2008-2011 and 2020-2021.

Recent Acceleration: The Russian invasion of Ukraine notably accelerated this de-dollarization trend, forcing nations like China and India to increasingly acquire gold to enhance their financial independence and avoid geopolitical risks.

Historical Precedents: Post-1971 Bretton Woods Collapse: Following the abandonment of the gold standard, the US dollar’s direct link to gold was cut, leading other nations to diversify their reserves into gold.

2010s-2020s: Countries such as China and Russia have consistently increased their gold reserves, viewing this strategy as a counter measure against potential sanctions from powers like the US and other broader geopolitical uncertainties.

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.

How Mutual Funds Allocate Across Sectors — And What It Reveals About Their Strategy

When you study mutual funds across different segments — large-cap, mid-cap, and small-cap — you start noticing clear differences in how they think and invest.

The sectors they allocate their money to tell us about their nature and style of investing.

To understand this, we analyzed what percentage of their portfolios each mutual fund category allocated to different sectors/industries over the last 10 years.

A clear pattern starts to show.

When you plot a heat-map of these allocations over time, it becomes easier to spot these patterns.

Even though each fund follows its own strategy, the funds within the same segment tend to behave similarly.

You can actually see this in the depth of colour.

Large-cap funds

We observe that large-cap funds are very stable. They usually invest in a few major sectors and stick with them every year. Most large-cap funds have a high percentage of their portfolio in banking, finance and IT.

In the heat-map, this shows up clearly — you’ll see thick, dark blue horizontal bands for those sectors/industries.

These sectors form the core of almost every large-cap fund we analyzed. Even when markets change, these funds don’t shift their sector allocations quickly.

Their approach is slow and steady.

During major events like the COVID crash in 2020 or market corrections in 2022, large-cap funds did not make big changes. They increased their allocations a bit to defensive sectors like FMCG and pharma, but the overall strategy remained consistent.

Mid-cap funds

Mid-cap funds behave differently from large-cap.

They show more variation in sector choices. This can be seen in the chart where the darker shade which shows allocation are wider and more spread out, covering more sectors/industries in mid-cap.

They also tend to be more active in shifting allocations and sectors. The most common sectors mid-cap funds allocate their funds to are capital goods, finance, auto, chemicals, and healthcare. These sectors usually make up a large part of the portfolio.

Their focus is mostly on domestic themes — companies that benefit from India’s infrastructure growth, manufacturing, and consumption.

Mid-cap funds also seem to invest in sectors like textiles, agri inputs, retailing, and plastic products.

Overall, mid-cap funds are more dynamic, theme-driven, and focused on sectors tied to India’s domestic growth.

This also means that mid-cap funds’ portfolios do not always look similar. There can be big differences — unlike large-cap funds where all pof their portfolios tend to look similar.

Notice how in the heat-maps of large-cap funds, the blue-bank was almost always in the finance sector across nearly all large-cap funds; but in case of mid-cap funds, there is no clear industry that is chosen by all mid-cap funds.

Small-cap funds

Small-cap funds seem to be most active and aggressive in their allocation style.

While some core sectors appear consistently — such as capital goods, healthcare, chemicals, auto, and finance — the way small-cap funds allocate to other sectors changes frequently.

There is a high level of churn, with allocation in new sectors appearing and disappearing every few quarters.

These funds invest in a wider range of sectors. The darker shade in the heat map can be seen spread across many more sectors compared to mid-cap and large-cap funds, including many that are not commonly seen in large-cap or mid-cap funds’ portfolios.

Examples include logistics, plastic products, cables, retailing, and diagnostics.

Stocks from these sectors often get bought for short periods and then get dropped off, depending on market trends and fund manager views.

During market corrections these funds usually remain invested toward high-growth, high-volatility sectors.

Overall, small-cap funds are managed with a focus on growth and upside.

They try to beat it by a bigger margin by taking early positions in emerging sectors.

This results in higher portfolio churn, and a broader mix of sectors compared to mid-cap and large-cap funds.

Top Performers

No Fund Stays at the Top Every Year

Every investor has asked this question at some point —

“Which is the best small-cap or mid-cap fund to invest in right now?”

The answer keeps changing.

Often faster than you’d expect.

The top fund today might not even show up in the top five next year. And the one at the bottom could be back at the top in just a few quarters. The rankings are constantly reshuffling.

So, what causes this? Why can’t one fund just stay on top?

There are two big reasons behind this constant shuffle in the leaderboard — and they have to do with both the manager and the market.

The first reason is simple: fund manager skill. In the world of small and mid-cap investing, stock picking matters. A lot.

So, when a manager gets it right — finds the right companies early, bets on the right sectors, avoids weak businesses — the results can be outstanding.

And that’s the edge that active managers bring to this space. But that’s just half the story.

The second reason is the market itself.

Even the most skilled manager has to play on the same shifting ground as the overall market.

But there’s another hidden challenge — as a fund grows larger in AUM, managing that money becomes harder. What worked at Rs 5,000 crore doesn’t work the same way at Rs 30,000 crore — especially in small caps.

At a smaller size, funds can pick niche companies with limited liquidity. But as AUM grows, they often have to dilute their bets. They might need to add bigger companies just to be able to deploy capital efficiently.

When we studied fund rankings between 2014 and 2024, we found few things:

- first, no fund stays on top every year.

-Over a 10-year stretch, 6 different funds claimed the #1 position at different times.

-In total, 19 unique funds appeared in the top 5 across that decade.

That’s a lot of rotation.

It means that just because a fund did well last year doesn’t mean it will do well this year — especially in volatile categories like small- and mid-caps.

“We believe that we are currently in a golden period, which is likely to last for at least the next five years. If India is to perform well in the coming years, as we all expect, the best way to capitalize on that growth will be through mid and small caps, as their earnings growth will likely outpace that of large caps.”

-Mr. Niket Shah (Motilal Oswal AMC, CIO)

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Part 3

Part 4

Part 5

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.

Markets That Moved, But Went Nowhere

Let’s take a moment and shift our focus.

So far, we’ve seen how small and mid-cap segments take the lead during strong rallies. We’ve seen how large-caps quietly move forward even when the rest of the market feels stuck. But what happens when nothing really moves at all?

Which part of the market has gone through the longest stretch of time without giving investors any meaningful return?

To understand this, we studied the longest stagnation periods across different segments — small-caps, mid-caps, and large-caps. These are the stretches where the index gave almost no returns.

The first chart at the top shows the performance of the Smallcap 250 index from 2007 to 2020 — a 12.5-year period.

While the line goes up and down many times, it ends at almost the same level it started at.

So, even after more than a decade, the total return was just +0.84%.

The second chart in the middle shows the largest stagnation period of Midcap 150 index — 2008 to 2014 — a period of 6.4 years. Here too, the end result is –0.12%.

The third chart at the bottom shows the Nifty 50 index’s longest stagnation period which was around 6.2 years with a return of +0.66%.

One segment stood out very clearly in this— small-caps and the 12.5 year period.

From the peak of 2007 — just before the global financial crisis, till the COVID crash in 2020, the small-cap index basically went nowhere. That’s a stretch of 12.5 years. And over that entire period, the total return was just +0.84%.

Imagine investing Rs 1 lakh at the start of that phase and just sitting on it for over 12 years. It would have grown to just Rs 1,00,840 That’s it. Practically no wealth creation.

And this is before accounting for inflation. Because once you do, it’s worse. That Rs 1,00,840 after 12.5 years In real terms would have lost value.

In this case, COVID was enough to wipe out whatever tiny gains had been built over the years before it.

Is this cherry picking data?

Yes. If you had just invested one year before that point in time or after, you would have much better returns.

Similarly, if you had withdrawn money a year before 2020 or a year after, you would still be making higher returns.

But still, the point remains — there was this 12.5 year period where the returns were nearly 0%.

When you compare all three indices , the difference becomes obvious.

During the same 12.5 year period in which small cap gave no returns:

Large-caps rose 50.3%.

Mid-caps rose +69.99% — despite going through their own stagnation phases.

This tells us that not all market phases are the same. And not all segments perform the same way during those phases.

“The key is to consider both the earnings growth you expect and the valuation you’re paying for a business. For example, in 2024, many small-cap, mid-cap, and even some large-cap companies were trading at 100 times P/E for two or three years forward. Even today, a P/E of 70 to 80 has become the norm. For these businesses with such high valuations, I would predict that their returns over the next five years could be flat or even negative, despite the companies doing well”

- Chandraprakash Padiyar (Tata AMC, Fund Manager)

Active vs Passive

Which Approach Works Better for Small & Mid-Caps?

With ETFs, index funds, and low-cost investing becoming more accessible than ever, a common question has started to come up more often.

Why should anyone pay higher fees for actively managed mutual funds when index funds are cheaper?

To answer this, we first need to understand how passive investing actually works.

A passive fund simply mirrors a market index.

For example, a Nifty 50 index fund buys the same 50 companies that make up the index, in the exact same proportions.

There’s no human judgment involved. No one is picking which stock to buy or avoid.

It’s a rule-based system — designed to track, not outperform. And because there’s minimal decision-making, the fees are also lower.

In large-cap markets, where businesses are already well-researched and widely followed, passive funds tend

to do fine.

In fact, they often match — or even beat — a lot of actively managed large-cap funds. But when you shift the focus to small and mid-cap stocks, the picture starts to change.

Small and mid-cap companies have less coverage, fewer analysts, scattered public info, and varied corporate governance compared to large-caps.

This is where a fund manager’s expertise can prove very useful — they can invest in good companies and avoid the bad ones.

Competent active managers deeply understand companies— meeting management, reading balance sheets, assessing promoter intent, and spotting early winners.

To test this idea, we looked at performance — comparing 5 of India’s oldest active mutual funds in each segment with their respective benchmark - indices.

What the data showed was clear.

In the large-cap space, passive funds performed very competitively. Most active funds struggled to consistently beat the benchmark indices.

But in mid-caps, the edge started to appear. Active funds showed better outperformance.

And in small-caps, the contrast was even stronger. Active funds offered the highest potential for outperformance — mostly because the space rewards good stock selection.

“I don't believe that simply investing in a small-cap index will yield better results for investors over the next few years. In fact, given current market conditions, one needs to be highly selective when choosing small-cap stocks. However, from a broader market perspective, the risk-reward profile currently appears more favorable in large caps compared to mid- and small-cap indices. That said, thoughtful stock selection will always have the potential to outperform.”

-Chandraprakash Padiyar (Tata AMC, Fund Manager)

Read Part 5

← Read Part 3

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.

Who Leads After a Crash — And Why It Matters

We’ve talked about recoveries before, but let’s zoom in on the most recent one to understand how each segment performed.

One of the strongest recovery rallies in recent history began in March 2020, after the COVID-19 crash. With stimulus packages rolled out across the world, markets bounced back fully by mid-2020 — just months after the steep fall due to the pandemic.

But the recovery wasn’t equal across all segments.

We tracked the performance of three key indices: Nifty 50 (representing large-cap stocks), Nifty Midcap 150, and Nifty Smallcap 250.

When we compared how much each of these segments grew from the bottom of the crash in March 2020 to the end of 2021, we found something interesting.

The chart on the right gives visual proof of a trend we have been discussing so far and the extent to which we see the difference.

Large-cap stocks (Nifty 50) recovered by around 136%.

But mid-cap stocks jumped even more — and small-cap stocks rose the most, rising by 231% over the same period.

This tells us that when the market turns positive, small and mid-cap stocks usually rise a lot more than large-caps.

That’s the tradeoff — they have more growth potential, but also come with more ups and downs.

In fact, this kind of behavior isn’t new. It follows a pattern we talked about in an earlier chapter about during bull markets.

Small and mid-caps tend to lead the rally, because they react faster to positive sentiment.

Once fear of bear markets fade and investors feel optimistic again, these stocks become the center of attention. The reason these segments became optimistic after a crash was because of the stimulus.

After COVID, governments released a huge amount of money into the system to boost the economy.

This flood of money usually finds its way into smaller companies, especially in the small and mid-cap space, which are often B2B businesses. Because these companies are smaller and more sensitive to inflows, they tend to benefit more when money starts moving again.

After a crash, small and mid-cap stocks also become very cheap. As the market recovers, their valuations rise quickly even if earnings haven’t fully caught up.

This is exactly what makes small- and mid-cap stocks so attractive in the early phase of a recovery.

It is important to know that this time there were many new retail investors entering the market as well.

Many of them were first-timers and they were drawn to small and mid-cap stocks because they seem cheaper and have the potential to grow faster. This helped push those stocks even higher.

Basically it shows that market leadership changes with each phase.

In tough times, large-caps protect your money. In good times, small- and mid-caps can grow it faster.

Small-caps typically move first, then mid-caps follow, and sentiment plays an important role in this shift.

But what happens in between?

Because the truth is, not every market phase is dramatic. Sometimes, nothing major happens. There might be just a

long stretch of waiting.

Let us understand that in the next chapter.

“So typically what we have seen in past is small and mid cap companies always have high beta. So when the market crashes, they fall much more than the large caps. But when market recovers, usually we have seen the faster recovery also in them.”

-Mr. Tejas Sheth (Axis AMC, Fund Manager)

Sideways Markets

Investing is not just about highs and lows. It’s about staying put through the boring middle.

So far, we’ve seen that small and mid-cap stocks often steal the spotlight during strong rallies. They bounce back faster, rise more dramatically, and end up delivering higher returns in bull markets.

But what happens when that excitement fades?

What if the market isn’t rising sharply… but also isn’t crashing?

We saw earlier that small-caps show strength in some phases. But it’s important to remember — those sharp swings usually last for a short time. In reality, most of the time, markets are not in an extreme state of euphoria or panic. They’re somewhere in between.

So it is important to study this as well.

There are two periods that help us understand this phase better—when mid-cap stocks remained largely flat for years.

The first one was from September 2009 to August 2014

The second was from early 2017 to early 2020

In both cases, we wanted to see: what happens when small and mid-cap stocks stop performing?

After a solid recovery from the 2008 crash, mid-cap and small-cap stocks peaked in late 2010 and then, for the next several years, these segments went almost nowhere.

They entered what’s called a consolidation phase — basically, moving ahead with no meaningful growth.

Small-cap stocks actually went negative during this time — falling over 19%. Mid-caps held steady, near zero returns. But, large-cap stocks (Nifty 50) rose around 6.6% over the same period.

Which might not seem like a big deal, but look at it in comparison to how other segments performed, and it stands out. It wasn’t a big growth, but it was steady progress, while other segments of the market stayed stuck or declined.

The same pattern showed up between 2017 and early 2020.

The small-cap 250 index fell by nearly 30%. Mid-caps dropped around 4.5%. And yet, during that same time, the Nifty 50 managed to gain around 20%.

These cases show us something important:

Large-caps don’t always deliver the highest returns, but they often hold their ground when other segments in the market slow down.

They tend to be more stable, more consistent, and less affected by extreme market swings. Over long periods, that consistency adds up.

So while small and mid-caps may be thrilling in good times, large-caps often carry the story forward in quieter stretches.

“So typically whenever we see that a peak of the interest rate cycle is where small cap and mid cap have outperformed large cap significantly. So if we see if 2020 to 2024 period in a very high hyperinflation environment and even in high interest rate environment, small caps kind of outperform because they get more opportunity to grow and they get more value for the productivity they generate.”

- Mr. Tejas Sheth (Axis AMC, Fund Manager)

“If you go back in January 2020, 10 year return of mid and small was not way higher than large. Actually I always highlight one point is, at that point in time, 10 year return for gold was similar to the large cap category. So that's where the starting valuations matter.”

- Shreyash Devalkar (Axis AMC, Fund Manager)

Read Part 4

← Read Part 2

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.

What Happens Between Entry and Exit

By now, you have probably started noticing something. The returns we saw earlier — especially in small and mid-cap mutual funds — aren’t fixed. They don’t just depend on what fund you chose. They depend on when you invested. And that part can change everything.

Two people, same fund, same amount — completely different outcomes. One might have seen their money grow by 30%. Another would have just reached 5%. A third could’ve even lost money.

Because, volatility.

That’s the word for when markets are moving a lot. But let’s try to really understand what it is.

Volatility just means how much — and how quickly — prices go up and down. If they’re jumping up and down a lot in a short time, it’s called high volatility.

If they’re barely budging with minor variations, that’s low volatility.

Keep in mind that volatility doesn’t tell you how good or bad an investment is. It tells you what the journey felt like.

Volatility tends to show up more when the world around us is uncertain. If there’s an election coming up or a policy change or some global event no one saw coming.

When people don’t know what’s going to happen next, they start reacting to everything. That nervousness is what causes big movements on the charts.

Let’s say a company announces amazing profits beyond expectations. Investors get excited, and the price jumps overnight. But if the government suddenly announces a tax policy that’s going to hurt businesses? The same price might crash the very next morning.

This bumpiness matters because it dictates what we pick based on our style and our personality.

Small-cap and mid-cap funds go through swings sharper.

It’s because of the kind of companies these funds invest in. They’re more closely linked to how the economy is doing, what policies are changing, where interest rates are headed, and what elections might bring.

So when there’s good news, these companies benefit faster. But when there’s bad news, they also get hit harder and faster.

To show you what this actually looks like in data, we plotted the average monthly price movements of 3 indices: large-cap, mid-cap, and small-cap.

We took 20 years of data, because short-term trends can only show a tiny picture.

All three indices — whether it’s the big blue chip companies or the smaller companies — mostly move in the same direction.

If the market is up, they’re all up. If it’s down, they’re all down.

But the difference was in the intensity of those movements. The small-cap index stands out in this respect.

In good months, they spike higher than anyone else. In bad months, they drop further than anyone else.

Mid-caps come somewhere in between. Large-caps, on the other hand, are more stable. Their movements are milder both up and down.

What someone earns at the end isn’t just shaped by the market — it’s shaped by whether they could stay invested through all those ups and downs.

Some of those ups and downs aren't small at all.

They're big market crashes that wipe out years of gains in weeks. But how a fund recovers is even more important than how it falls.

Crash and Recovery

The category you hold decides how you experience a downturn

At this point, one might think, “okay, small-caps are volatile… but can I really handle the ride?”

That’s a fair question. Because so far, we’ve seen how small and mid-cap funds move around more than large-caps. We saw how they can swing higher in good times, and fall harder when things go south. And we also saw how just the timing of your investment can change your returns completely.

Big market crashes and the recoveries show the actual difference between large-cap, mid-cap, and small-cap funds. Because they don't only fall in different ways, they also bounce back differently.

Let’s start with the falls.

If you look at the chart on the right side of this section, you’ll see how each segment — large-cap, mid-cap, and small-cap — performed during 5 major market crashes.

Starting from the global financial crisis in 2008, and going all the way to the recent decline in 2024-2025.

Most times, large-cap funds fell the least. And every time, small-cap funds fell the most.

The reason for this must have become clear by now. Large-cap companies are big, stable businesses. They’ve been around for longer time. They have more reliable cash flows. Their fall is usually lesser.

Small-cap companies, on the other hand, are usually younger, smaller, and more affected by the ups and downs of the economy. So when fear spreads, they tend to get hit the hardest.

But here’s where it gets interesting.

Once the crash is behind us, the whole thing flips.

If you look at the chart below this paragraph, you’ll see what happens during the recovery period after each crash.

Here, small-cap funds lead every market rebound. In almost every case, they bounce back faster and stronger than the others.

Small-caps fall more when the market crashes. But they also rise more when things start to improve. They react faster. They’re more sensitive — both to fear and to opportunity.

Mid-caps fall somewhere in the middle. Not as deep as small-caps, but not as steady as large-caps either. And large-caps recover more slowly, more steadily.

This difference between how much each category falls and how much it recovers shapes how people behave as investors.

Some investors are drawn to this. They want the big comeback. They’re okay with the fall because they’re confident about the recovery and they start pumping in money.

Others prefer something smoother — something with fewer ups and downs. So they stay with large-caps. It depends on investment style, goals, and tolerance for volatility.

And that brings us to the next chapter.

Read Part 3

← Read Part 1

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.

Zooming Out to See the Full Picture of Mutual Fund Performance

We started with a very basic question.

What if someone had invested Rs 1 lakh in a small-cap fund, 10 years ago? How would it grow?

While it sounds simple, it tells us how investing in a mutual fund really works. Because most of us don’t constantly jump in and out of funds. We invest, we wait, and we hope it grows.

So we took that Rs 1 lakh example and applied it to different categories of mutual funds: small-cap funds, large-cap funds, mid-caps, flexi-caps, multi caps.

This is where things got interesting.

The numbers tell that small-cap funds won the race by a good margin.

Some small-cap funds even gave twice the returns. Even the poorer-performing small-cap funds were ahead of large-caps funds.

We often hear about volatility in small-caps. They are known to rise sharply and fall just as fast. But what happens if you stay invested through those ups and downs? The data showed that the recovery from those lows often pushed final returns higher over time.

So why does large cap still capture all the attention? To understand that, the missing part of the story needs to be understood.

Because most investors panic when they see their portfolio in red, and think, “This isn’t working. I need to get out.”

That’s human. But it’s also the exact moment when patience matters the most.

The problem is — most people never see the full picture.

Returns — especially over a long stretch like 10 years — can often be misleading if viewed without context. They only show you the final destination, not how wild the journey was.

That’s the part we now need to explore. There’s a reason large-caps continue to be the default choice for many. And there’s a reason small-caps often come with a stronger warning.

This chart gives us a starting point, not a conclusion. From here, we’ll understand not just how much return each category gave, but how it got there.

“As I said, mid cap, small cap can be much more volatile as compared to their large cap peers. So the longer your investment horizon is, the better it is for small and mid cap categories.”

- Mr. Rupesh Patel (Nippon India AMC, Fund Manager)

Okay, so we saw something — small-cap funds didn’t just perform well. They outperformed. Over the decade, most of them created more wealth than large-cap funds did.

That seems pretty rosy.

But that’s also just one piece of the story.

Anyone who has ever opened a mutual fund screener already knows this: mutual funds aren’t just divided into small and large. The universe of mutual funds is much broader than that.

There’s a whole middle ground — with mid-cap funds, multi-cap funds, flexi-cap funds, and a few hybrids.

Each fund has its own personality.

Some shift their portfolio as the market moves.

Some stick to a style.

Some try to do a little bit of everything and just chase opportunities wherever they pop up.

So, just to be fair to everyone, we decided to zoom out.

We took 80 mutual funds across all these categories and applied the same method:

A hypothetical Rs 1,00,000 invested in each fund, held for 10 years, with no switching, and no timing.

Then, we stacked the results fund-by-fund next to each other, from the best-performing to the least-performing one.

Here we see something interesting.

If we look closely, we’ll see that a few mid-cap and flexi-cap funds have made their way into the list of top performers.

It showed us that strong returns weren’t limited to just one category.

On the other end — the bottom of the chart. As expected, many large-cap funds ended up there.

Not because they performed badly, but because they just didn’t grow the money as much compared to other funds.

We also see that some multi-cap and flexi-cap funds are there too — funds that were supposed to have the ‘freedom to move anywhere’.

They have performed quite well — just not as well as small-cap funds.

“Flexi-cap funds by design give the fund manager complete flexibility to adjust the allocation between mid, small, or large-cap stocks, offering significant flexibility to investors as well.”

- Mr. Niket Shah (Motilal Oswal AMC, CIO)

Rolling Returns

A Better Way to Measure Performance

Point-to-point returns are very sensitive to entry timing. But in reality, no one can pick the perfect entry date every time. And that’s why these numbers can be very misleading.

Let’s talk about the first thing every AMC or online broker shows when you open their app — the returns. The app typically displays its past 1, 3, and 5-year returns.

Let's say that we are looking at returns for a small-cap fund on 1 Jan 2025, which shows a 3-year return of 18.5%.

On the next day (2 January 2025), we check the same fund and we see that the 3-year return has now increased to 19.2%.

A difference of 0.7% in just one day.

This is because on 1st Jan 2025, the 3-year return is calculated from exactly 3 years before that (1st Jan 2022 to 1st Jan 2025).

On 2nd Jan 2025, it’s calculated from 2nd Jan 2022 to 2nd Jan 2025.

We can clearly see that one day drops off from the past, and a new day gets added. This is how the returns are calculated (like in the above example of a 3-year period).

But, this way of calculating returns has limitations.

What is it, and why does this happen?

The way a point-to-point return is typically calculated is by calculating from the same day three years ago — and that starting day keeps shifting as time moves forward.

Even a one-day change in the start date can make a big difference in what return we see. This big difference becomes especially true for small-cap and mid-cap funds, which tend to move up and down much more sharply than large-cap funds.

This brings us to something every investor has probably felt — the regret of not getting the timing just right.

“If only I had invested last January, I’d be up 30% instead of 12%.”

So how do fund managers and investors deal with this?

They look at something more comprehensive — Rolling Returns.

Rolling returns don’t just look at one start date. They look at all possible start dates. If we want to check 1-year rolling returns for a fund, we don’t just check Jan 1 to Jan 1. We also check Jan 2 to Jan 2, then Jan 3 to Jan 3, and so on — for every single day. This gives us the complete picture, not just one result.

And this is where you start to understand how an investment actually behaved. It’s about understanding all the possible outcomes — from good to bad — over the years.

“So if you look at point to point data, whether it is 3 year, 5 year, 10 year, 15 year, you can see that small and mid caps, as a category, have delivered superior returns as compared to large cap. But mind you, this is point to point data, you should also look at the rolling return data to draw right kind of conclusions.”

- Mr. Rupesh Patel (Nippon India AMC, Fund Manager)

To understand these gaps, we checked the rolling returns of small-cap and mid-cap funds from 2016 to 2024.

For a 1-year holding period, the best return someone could have earned was +53%.

The worst was –22%.

Over 5 years, the best annualized return was around 25%.

The worst was just about 4%.

Even over 10 years, some entry points gave returns above 40% per year, while others barely gave anything.

The key isn’t just entering at any time — it’s entering at the right time.

Rolling returns make all of this evident. What was the best someone could have earned? What was the worst? And what kind of ups and downs did they go through?

So yes — point-to-point returns are what most people look at. But they only tell us one version of the story. Rolling returns help you see the whole picture.

Now that we understand this, let’s move forward.

“Okay, I get the returns. But what does the journey actually look like?” — a valid question.

This is answered by the concept of volatility. Not just the textbook definition — but what it actually means for your mutual fund journey. How smooth or shaky it feels. How much your portfolio moves each month.

Let’s dive into that next.

Because if returns are what we chase, volatility is what we live through.

“Since 2018, the small-cap universe has changed significantly, reducing the extreme volatility that used to be common. Previously, investors faced swings like 80% gains and 90% losses due to young, cyclical businesses. However, in the past five to six years, volatility has decreased, and with these changes, small-cap investments are no longer as risky as before.”

- Chandraprakash Padiyar (Nippon AMC, Fund Manager)

“If you believe a business has long-term growth potential and the valuations are right for investment, the key to making money is to buy when conditions are tough. You mentioned rolling returns, which reflect the volatility of any segment. It's generally true that the rolling return chart for small and mid-caps tends to be more volatile than that of large caps.”

- Mr. Rupesh Patel (Nippon AMC, Fund Manager)

Read Part 2

The information presented in this post has been compiled and prepared by Groww Invest Tech Pvt Ltd and is intended solely for informational purposes. It is not tailored to any specific investment objectives, financial situations, or needs of any individual investor. The content should not be construed as investment, financial, legal, or tax advice and should not be relied upon as a substitute for professional consultation.

Investing in securities markets involves inherent risks. Investors are advised to carefully review all relevant documents and consider their own risk tolerance before making any investment decisions.

Mutual fund investments are subject to market risks; please read all scheme-related documents carefully. Past performance of financial instruments, schemes, or markets is not indicative of future results.

Groww Invest Tech Pvt Ltd is registered with the Securities and Exchange Board of India (SEBI) under Registration No: INZ000301838, as a Research Analyst under No: INH200008662, as a Depository Participant under No: IN-DP-417-2019, and with the Association of Mutual Funds in India (AMFI) under ARN-111686.