50% small-caps trade 40% below peak; correction opens long-term buying window

A recent study by Abakkus Mutual Fund cited that nearly 50% of small-cap stocks (with market cap between ₹2000 crore and ₹34,700 crore) are currently trading ~40% below their all-time-high levels. 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.

Growing constituency of small-cap in the equity market cap universe

Between CY2019 and CY2025, market capitalization of small-caps has increased from INR 16 trillion to INR 83 trillion, expanding its value by 5.30x. Small-caps have recorded much faster appreciation in their market cap value compared to large-caps (2.55x) and mid-caps (3.89x).  The constituency of the category has also expanded from 11% in CY 2019 to 19% in CY 2025 in the market cap universe of Indian equities.

“With nearly half of the stocks of the small cap universe (between ₹2000 crore and ₹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 ₹2,000 crore to ₹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,” said Vaibhav Chugh, CEO, Abakkus Mutual Fund.

Small-caps offer exposure to emerging and sunrise sectors shaping India’s growth story. These include Aerospace & Defence, Pharmaceuticals & Biotechnology, Electronics Manufacturing Services, EVs & Batteries, AI-led services, Renewables, Medical Devices, Travel & Tourism, and Auto Components. Many of these themes remain underrepresented in large-cap indices.

Performance comparative: Nifty Smallcap 250 versus Nifty 50

Small-caps are typically associated with higher volatility, compared to large-caps. However, the study shows that despite higher standard deviation, Nifty Smallcap 250 SIP returns has delivered superior long-term growth with CAGR of 17% in comparison to the Nifty 50 SIP returns of 12%—since September 2016.

The Nifty Smallcap 250 index beats the Nifty 50 index on the three-year and five-year periods too, recording CAGR of 21% and 22% versus the latter’s 13% for both intervals.

“The better long-term return delivered by the small-caps reinforces the importance of staying invested through cycles rather than attempting to time the market,” said, Mr. Vaibhav Chugh.

All schemes under Abakkus Mutual Fund follow the in-house MEETS framework, which focuses on Management pedigree and track record, Earnings quality and the ability of companies to multiply profits, Events/Trends that affect or disrupt operations, Timing of investment at reasonable pricing and Structural aspects like size of the opportunity and competitive positioning.