Kolkata: Abakkus Mutual Fund has stated in a report that about half the small-cap stocks are trading ~40% below their all-time-high levels. Its conclusion: this creates an opportunity to identify small caps for allocation. By small caps, the mutual fund means stocks with Rs 2000 crore and Rs 34,700 crore.
Significantly, when foreign institutional investors began pulling out money from the Indian stock market in late 2024, one of the concerns was stretched valuations. However, with the correction, small caps have come back into the reckoning for fresh investment. “Market resets – like the recent corrections may create a potential accumulation window to acquire high-potential businesses at more sustainable valuations before the next growth cycle begins. This will also create opportunities for the investors to make strategic long – term investment allocations in the small – cap space,” it was mentioned in the study.
Improved risk-reward levels
“With nearly half of the stocks of the small cap universe (between Rs 2000 crore and Rs 34,700 crore market cap) trading below ~40% of their peak, investors have an opportunity to accumulate fundamentally strong businesses at sustainable valuations before the next growth cycle unfolds. A meaningful portion of companies in the Rs 2,000 crore to Rs 34,700 crore market capitalisation bracket are now available at improved risk–reward levels. Most importantly, exposure to sunrise industries and varied sectors that are difficult to access in the large-cap space, are majorly available in the small-cap category,” Vaibhav Chugh, CEO, Abakkus Mutual Fund, was quoted in the media as saying.
One of the significant points about the small cap universe is that these stocks now account for 19% of India’s equity market capitalisation. They constituted just 11% in 2019. The total market cap of small-cap companies jumped from Rs 16 trillion to Rs 83 trillion, which translates to a surge of 530%. Significantly, this pace of growth is faster than large-cap stocks which jumped 255% mid-cap stocks which leaped 389%.
Sectors in small cap
Also small-cap stocks offer investors exposure to multiple emerging sectors. These are aerospace, defence, pharma and biotech, electronics, electric vehicles, batteries, auto components, AI-led services, renewable energy, medical devices, travel and tourism. The study has mentioned SIP investments in the Nifty Smallcap 250 index offered CAGR of about 17% since September 2016. For the Nifty 50 universe, it is 12%.
For long-term investors, the current phase could represent a valuation reset rather than a structural slowdown, providing opportunities to accumulate fundamentally strong businesses with improved risk-reward potential.
However, given the inherent volatility of small-cap stocks, staggered investing and diversification remain important strategies when allocating to this segment.
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