Smallcap stocks fall more when the market falls. They rise more when the market is bullish. The market has shown consolidation after making an all-time high at the end of September 2024. This has affected smallcap stocks. A study by Abacus Mutual Fund shows that shares of almost half of the small-cap companies (2,000 to 34,700 market capitalization) are down about 40 per cent from their all-time high. The question is, is this the right time to invest in smallcap stocks?
Market capitalization to quintuple between 2019 and 2025
Between 2019 and 2025, the market capitalization of small cap companies increased from about Rs 16 lakh crore to Rs 83 lakh crore. This is more than the growth of market capitalization of midcap companies and largecap companies. During this period, the share of small cap companies in the stock market increased from 11 percent to almost 19 percent.
17 percent CAG return from 2026 till now
Long term returns of small cap stocks are also strong. The returns from SIP investment in Nifty Smallcap 250 have been around 17 per cent CAGR since 2016. This is more than the 12 percent CAGR return of Nifty 50 during this period. This means that even though small cap stocks may be more volatile in the short term, they perform better in the long term.
Weakness in small cap stocks since last one and a half year
According to Gautam Kalia, Chief Investment Solutions Officer, Mirae Asset Sharekhan, both time and price corrections have been seen in small cap stocks for some time. It is rare to see both types of correction together. He said, “Smallcap stocks have not seen a rise in the last one and a half years. The prices started falling from October-November. Right now the sentiment is weak but the earnings data is encouraging. At the current prices, valuations look fair. They are neither cheap nor expensive right now.”
Advice to avoid hasty and lump sum investment
“The allocation has gone up to around 15 per cent to 25 per cent. But, it is not much. This is the time to slowly invest in smallcap stocks as there could be further downside,” he said. This means that investors should not rush to invest in small cap stocks but should invest slowly and thoughtfully.
SIP investment advice in a disciplined manner
Vijay Maheshwari, CWM and Founder, Stocktick Capital, said that investors can invest in a disciplined manner through SIP without paying attention to the fluctuations in the market. Investing in smallcap stocks increases growth. But their stake in the portfolio should be balanced. He said that large cap stocks provide stability in case of decline. Growth gets support from midcaps. Smallcaps enhance returns with their limited stake in the portfolio.
Invest for at least 7-10 years
Experts say that valuations have come down recently and investment opportunities are visible in many smallcap stocks. But, it would be better to invest gradually rather than lump sum. Smallcap stocks reward patience and discipline. Kalia said that investors can invest for long term through SIP. Long term means investment for at least 7-10 years.