According to a report in The Economic Times, small and mid-cap stocks are making a rally in India recently. Mutual fund companies are launching funds that focus their investments in the markets. Last month ICICI Prudential AMC launched a value fund to invest in the market. Axis AMC and Pramerica AMC also recently introduced funds looks for investment opportunities in mid and small-cap stocks.

For those comfortable with the risks that these types of investments carry, the report said there are compelling reasons to invest in them at this point. One of these is the valuation differential that exists between large-cap and the mid and small-cap stocks. The report said that large-caps will not anymore offer any substantial upside now since they have already risen significantly.

Axis Mutual Fund CEO & MD Chandresh Nigam told The Economic Times, "The valuation differential between the frontline index stocks and smaller market-cap stocks is significantly high. As the economy improves, the interest is bound to return to this high-growth segment, which offers opportunity for investors to make money."

Selected mid-cap and small-cap companies have also shown robust growth at this time that it makes sense to invest in them, according to the report. These include Sintex Industries, Alembic Pharmaceuticals, KEC International, Balkrishna Industries, Ceat and Supreme Industries which posted strong earnings at this time.

Although the upward movement of share prices does not confirm that the small and mid-cap segment has revived, investors can be assured to a certain degree. The report said that the future looks good for firms that have a healthy balance sheet and cash flow, good management practices and low debt.

For investors who are looking for investment opportunities in the segment, the ideal for investment time would be five years, said the report and added that foremost, they should only make their investments in funds with a proven track record.