Small Caps Beat Large Caps Over Past Year But Stock Picking Matters Most

Small-cap stocks have beaten large-cap stocks over the past year despite recent market drops. The Nifty Smallcap index 100 fell 4.4% in the past month but gained 0.2% in three months, 15% in six months and 6.4% over the past year. In comparison, the Nifty 50 dropped 4% in one month, 6% in three months, 5.4% in six months and 11% over the past year.

Market Factors And Outlook

Geopolitical events, higher crude prices, US interest rates and currency movements could cause short-term market swings. Over the next 12 to 24 months, earnings growth and business fundamentals will increasingly drive investment results. Monarch AIF remains positive on quality small-cap stocks due to strong balance sheets, healthy domestic demand, better cash flows and capital expenditure plans. Monarch AIF noted that corporate balance sheets improved at the end of FY26 compared with FY25, supported by auto sales, credit growth in the high teens and strong consumer demand. Abhisar Jain, fund manager at Monarch AIF, said low debt, better cash generation and planned investments will support smaller companies. Jain added that government policies for semiconductors, aerospace, renewable energy, automotive and defence will provide growth visibility.

Stock Selection And Valuations

Fund managers say investors must look at individual stocks rather than just market categories. Vaiibhavv Chugh, CEO of Abakkus Mutual Fund, stated that about 45% of mid-cap stocks trade below 30 times earnings while about 40% trade above 40 times earnings. Chugh warned that low valuations alone are not enough to buy a stock. Monarch AIF also sees value in select large-cap companies in banking, financial services, insurance, telecom and parts of the information technology sector.

Context

Market experts often look at how different market segments perform to help investors manage risk and pick stocks. Small-cap companies are typically smaller businesses that can grow faster, while large-cap companies are established firms with stable earnings.