The small-cap segment of the Indian stock market has been witnessing strong momentum lately as market sentiment improves amid a fall in crude oil prices from their multi-year high levels, signs of easing tensions in West Asia, and strong domestic retail buying.
The Nifty Smallcap 250 index has gained over 13% in April till the 16th, compared with an 8% rise in the benchmark Nifty 50.
Small-cap stocks, such as Ola Electric and Gallantt Ispat, have surged up to 70% this month. In fact, more than 230 stocks in the Nifty 250 index are in the green for April so far, with as many as 175 stocks rising more than 10%.
On Friday, 17 April, the Nifty Smallcap 250 index rose by more than 1% during the session, even as the Nifty 50 rose by half a per cent.
Should you chase the momentum?
Hopes are high that the US-Iran deal will be finalised soon, eliminating a major headwind for the markets. However, it appears unlikely that the domestic market will see a sustained rally from here on as the impact of elevated crude oil prices on the Indian economy and earnings of India Inc. cannot be fully ascertained at this juncture.
Experts also point out US President Donald Trump’s track record of flip-flops on his words.
“President Trump’s bravado has to be taken lightly, going by his track record of total inconsistency. Investors should be guided by actions rather than words,” said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.
Vijayakumar underscored that the fear of FIIs again turning sellers on rallies is weighing on large caps. Therefore, the broader market may do better in the near-term, supported by the fund flows and retail buying in the segment, said Vijayakumar.
Experts appear cautious about the persisting geopolitical uncertainties and believe large-caps are better bets at this point. They believe that while it is not the wrong time to look at small-caps, it is also not a phase to be overly aggressive on them.
Arpit Jain, joint MD, Arihant Capital Markets, believes that while there is no harm in having exposure to small- and mid-caps, fresh buying at current levels should be measured and staggered, rather than aggressive.
Jain further said that several companies are expected to deliver decent earnings growth, with FY27 likely to be a better year for many businesses as operating conditions improve.
Macro risks like higher oil prices could act as a headwind, but oil prices have already corrected meaningfully from their peak by nearly 25%, which offers some relief.
“The approach should be to accumulate on declines, focus on quality names, and maintain a medium- to long-term perspective rather than chasing momentum at elevated levels,” said Jain.
Stretched valuations a key risk
Experts highlight that the recent rally in most small-cap stocks has stretched near-term valuations.
Uttam Kumar Srimal, Senior Research Analyst at Axis Securities, underscored that valuations of small-caps are near historical averages or a little higher, indicating that a significant portion of future growth is already priced in. This leaves a limited margin for error, and any disappointment in earnings or execution can lead to sharp corrections.
“Macroeconomic pressures, particularly rising crude oil prices, pose a meaningful risk. As India is a net importer of oil, higher prices can lead to increased inflation, higher input costs, and delayed monetary easing. Small-cap companies, which often have limited pricing power and higher operating leverage, are more exposed to such cost pressures, potentially impacting their profitability and growth outlook. Be prepared for volatility; drawdowns of 20–30% are not unusual in this segment,” Srimal said.
Srimal also advises avoiding chasing the momentum and focusing on companies with strong balance sheets, expected earnings growth over the next two to three years and competent management with a proven track record.
Tushar Badjate, Director of Badjate Stock & Shares, has similar views.
“Even after the recent 8–10% decline in 2025, valuations at nearly 31 times remain slightly above the long-term average of 28 times, and near-term pressures like elevated crude prices are real, but markets tend to turn when sentiment is weak, not when conditions are perfect,” Badjate noted.
Badjate, however, highlighted earnings resilience.
“India’s 5-year earnings growth at nearly 16.2% remains the strongest among emerging markets, where most peers are below 8%. Consensus expectations of 12–16% earnings growth for FY27, with projections of up to about 17–19% CAGR through FY28, suggest that once stability reflects in numbers, the narrative can shift quickly,” Badjate said.
Historically, phases like this have created the best entry points.
As Badjate explained, between FY19 and FY24, small-cap PMS delivered nearly 23% average returns, outperforming large-caps by about 91%. 73 small-cap companies delivered over 5 times returns in the five years leading up to April 2024, compared to just 10 mid-caps and none in large-caps.
“Our approach is to accumulate corrections, not exit, but with discipline. This is not a broad-based buying opportunity. Capital should be directed toward sectors with clear earnings visibility, such as banking, infrastructure, metals, defence, water management, and healthcare. This is not the time to be fearful, but it is the time to be selective and gradually build exposure,” said Badjate.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
