MUMBAI
:
When US President Donald Trump spooked the markets with his tariff threat earlier this year, small- and mid-caps landed in bear territory, with the Nifty Smallcap 250 and the Nifty Midcap 100 correcting 25% and 21%, respectively, from their September peak by February end.
Now, markets have staged a comeback, so has the SMIDs vs bluechip dilemma.
Chasing high returns often requires investing in small- and mid-cap stocks for their explosive growth potential—a high-risk, high-reward strategy.
However, according to market experts, it could be in retail investors’ best interest to curb their enthusiasm because if earnings continue to underwhelm, SMIDs could see a deeper correction.
Low earnings, high valuations
The March quarter earnings have largely disappointed, with most companies in the BSE 400 failing to deliver meaningful growth, said Saurabh Mukherjea, founder and chief investment officer (CIO) at Marcellus Investment Managers, adding that valuations are once again creeping into expensive territory.
To be sure, the Nifty Smallcap 250 is trading at a price-to-earnings (P/E) ratio of 33.35, significantly lower than its about a decade-long average of 48.20, while the Nifty Midcap 100 is trading at a P/E of 33.38, well below its 10-year average of 45.65, according to Bloomberg.
He advised investors to trim exposure to small- and mid-caps and focus on high-quality large-cap stocks, warning of a potential deeper correction, possibly 30-40%.
The Nifty 50 is currently trading at a P/E of 21.88, slightly above its 10-year average of 20.89. Besides, the Nifty 50 has risen over 6% in 2025 against the Nifty Midcap 100’s 4.34% gain and the Nifty Smallcap 250’s 1.17% fall.
Harsha Upadhyaya, president and chief investment officer (CIO) at Kotak Mahindra Asset Management Co. Ltd, agreed, saying the 2024-25 earnings story has not exactly played out as expected. “We kicked off the year with hopes of 15-16% earnings growth for large-caps and around 20% for small- and mid-caps. But, actual numbers have fallen short.”
According to Kotak Mutual Fund estimates for 2024-25, the Nifty 50 earnings grew 6%, the Nifty Midcap 150 12%, and the Nifty Smallcap 250 16%.
Looking at the March quarter earnings, small-caps have had a rougher ride.
“If we split 4QFY25 performance in terms of market capitalisation, we see 31% of small-cap companies missed expectations, while the misses were lower in mid-caps and large-caps at 28% and 17%, respectively,” said a 3 June report by JM Financial Institutional Securities.
Hopes of recovery
That said, the market is still holding on to hopes of a recovery across segments over the next couple of quarters. If that plays out, valuations might remain elevated. “But if earnings continue to disappoint, small-caps could face a sharper derating.”
The only thing that can support higher valuations of small-caps—and mid-caps in that order—is superior growth over large-caps, which was the case from 2020-21 to 2023-24, Upadhyaya said. During the period, the Nifty 50 earnings saw a compound annual growth rate of 25%, less than the Nifty Midcap 150’s 41% and the Nifty Smallcap 250’s 32%.
“In 2024-25, we haven’t seen that kind of outperformance. If it returns, these pricey valuations may stick around. But if earnings momentum slips, the broader market could see a correction,” he added.
Meanwhile, small-cap funds remain an investor favourite despite the concerns of a bubble. In 2025, they have consistently cornered the largest share of declining monthly inflows in equity mutual funds.
Sailesh Raj Bhan, CIO of equity investments at Nippon India Mutual Fund, noted that a systematic investment plan with a medium-term horizon is a reasonable strategy for mid- and small-cap stocks.
Though large-caps stand out as sensibly priced, he added.
