Interest in small cap and mid cap stocks have been rising in the last few months — all thanks to growing returns in the broader market in comparison to the large cap stocks.
Nifty Smallcap 100 has given over 5% returns in the last one month while Nifty Midcap 100 index delivered over 4%. On the other hand, large cap company index Sensex provided nearly 3% returns to investors.
The broader market indices outperformed the benchmark index in April as well. “After a muted March, the Indian stock market rose 4.5% in April, with the Nifty 50 rising around 4.0% while mid and small-caps rose around 5.2% and around 6.8%, respectively,” said a report by Motilal Oswal Mutual Fund.
“All sectors contributed positively to the rise of Nifty 500 in April, barring IT, which dragged overall performance due to below-estimate growth in income. Financial services surprised positively by contributing 2% (highest) to the overall rise of 4.5% of the Nifty 500 in April 2023,” added the report.
|Indices||1 month||3 months||1 year|
|Nifty Smallcap 100||5.16%||4.92%||7.90%|
|Nifty Midcap 100||4.21%||6.25%||15.81%|
Midcap stocks in a ‘sweet spot’
In 2022, small cap stocks have corrected and this fall is an opportunity for investors to build their small cap portfolio, said Yogesh Kalwani, head of investments at InCred Wealth.
“Since Q2FY23, we have seen significant earnings downgrades for FY24/25 within small and mid cap (SMIDs) and hence as a result, we are now seeing the pace of earnings downgrades slowing down. We think this is somewhat a middle stage usually where the downgrades continue but slow down, before eventually reaching a point over the next one year when a trend of earnings upgrades start again,” said a report by Nuvama Institutional Equities.
Adding to it, inflows into the equity mutual funds during April were led by consistent flows in small and mid cap funds at ₹2,182 crore and ₹1,790 crore respectively.
Analysts say that the small cap stocks outlook will start to improve from here as their earnings will start improving.
Also midcap stocks are in a sweet spot to perform better than large and small cap companies.
“Fundamentally, the midcap sweet spot has a possible reason. Small-caps that outperform for more than two–three years end up in the mid-cap bucket and, generally, these additions are of proven performers for some years, which is not possible unless there is support from strong earnings growth. On the contrary, large caps that fall to become mid-caps are not necessarily the worst of stocks. This makes mid-caps a potent zone, in our view,” said a report by Nuvama.