This sharp rise dwarfs the returns of large-cap and mid-cap peers and underscores the growing clout of small caps in India’s equity landscape.
The study found that while large-cap and mid-cap indices posted a CAGR of 14.5% and 21.6% respectively between 2017 and 2024, small caps have firmly outpaced them. More telling was the contribution of small-cap companies to the overall market capitalisation, which rose 1.4 times over the past three years, even as their share of corporate profits swelled 2.5 times in the last four years.
Despite a modest 4% rise in the small-cap index since FY24, the segment saw a 38% jump in profit after tax (PAT) during FY25, climbing from Rs 21,669 crore to Rs 29,941 crore. Bajaj Finserv AMC pointed out that this decoupling between prices and earnings suggests “unrealized value” in the space.
Moreover, the study noted that “74% of the top 250 small-cap companies reported a double digit returns on capital employed (ROCE),” signaling strong fundamentals despite recent price corrections.
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Quality is key as volatility persists
The second half of FY25 saw a correction in small-cap stocks, with most still trading below their 52-week highs as of April 2025. This has opened up “an opportunity to accumulate quality small caps at better valuation,” the study said.
Still, the volatility underscores the importance of selectivity. Bajaj Finserv AMC warns that “nearly 50% of small-cap companies from 2017 have declined into the micro-cap category,” reinforcing the risk of indiscriminate exposure. Although 196 small-cap IPOs hit the market since 2020, only four have transitioned to mid-cap status and none to large-cap territory — further highlighting the need for careful stock selection.
Quality index outshines peers
Bajaj Finserv AMC emphasized that quality small caps have consistently outperformed their broader counterparts. “The Nifty Small Cap 250 Quality 50 TRI has outperformed the Nifty Small Cap 250 TRI in 14 of the last 19 financial years,” the study said.In fact, the quality index “delivered higher returns than all other indices in nine financial years from FY10,” with evidence that it has weathered volatility better in 17 of the past 19 financial years.
Additionally, in some years, the Small Cap Quality index “has exhibited lower standard deviation than large caps,” the study said, underlining its potential for steadier performance.
While smallcaps remain prone to cyclical movements and elevated risk, the study presents a case for investors to reassess the segment with a quality lens. The long-term outperformance of quality indices and growing earnings power signal a maturing sector, albeit one that still demands rigorous screening and discipline.
Also read | Neither largecaps, nor smallcaps! India Inc’s Q4 result season belongs to the middle order
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)
