The Case Against “Chasing” Small Caps
Imagine three investors, each with ₹1 crore to deploy in January 2018 (Peak of small caps in the last cycle). Their only decision: which index to track.
- Investor A chose Nifty 50 (large caps)
- Investor B chose Nifty Midcap 150 (mid-caps)
- Investor C chose Nifty Smallcap 250 (small caps)
The Performance Over 8 Years – Absolute Returns
- Investor A (Nifty 50): ₹1,00,00,000 → ₹2,40,00,000 (140% absolute return)
- Investor B (Nifty Midcap 150): ₹1,00,00,000 → ₹2,80,00,000 (180% absolute return)
- Investor C (Nifty Smallcap 250): ₹1,00,00,000 → ₹2,00,00,000 (100% absolute return)
The uncomfortable truth: the small-cap investor—despite investing in the segment with the highest theoretical growth potential—ended up with the lowest returns. Four million rupees lower than the large-cap investor.
This wasn’t bad luck. This was the inevitable consequence of chasing performance at the wrong moment.
Valuation Matters in Small Caps
The CAGR reveals the fundamental dynamic: while the Nifty Smallcap 250 did deliver the highest returns during the sweet spot period (Apr ’21 to Mar ’24 at 26.8%), it paid a devastating price for arriving at the party too late during 2018 to 2021 as those who bought small caps in January 2018 were essentially paying full price for a rally they would participate in only partially.
The highest growth potential doesn’t always yield the highest returns if you’re buying at peak valuation.
Conversely, the Nifty 50 has been consistently “boring,” undervalued relative to growth, and misunderstood. It delivered steady 10.6% CAGR over the full 8-year period. It wasn’t exciting. But it was consistent. It was cheaper. And it compounded.
Here’s an uncomfortable but critical observation: The Nifty Smallcap 250 suffered a -1% return during the Jan ’18 to Mar ’21 period, while the Nifty 50 delivered +39%.
This wasn’t a random market event. This was small caps being expensive relative to their earnings growth, then having to endure three years of valuation compression before the cycle reset. Investors who held on were eventually rewarded—but only during the Apr ’21 to Mar ’24 bull run.
The volatility tax—the cost of enduring larger drawdowns and corrections—is real, and it’s devastating to long-term returns when you’re buying at peak valuation.
The Three Lessons for Investors
Lesson 1: Growth Potential ≠ Return Potential
The Nifty Smallcap 250 has higher growth potential than the Nifty 50. But growth potential is worthless if you’re paying for it in advance through higher valuations. Many investors chase high-growth segments after they’ve already run 80%, thereby guaranteeing they’ll capture only the remaining 20% while bearing the entire correction risk.
Lesson 2: Consistency Compounds
The Nifty 50’s steady 10.6% CAGR generated ₹2.40 crore from ₹1.00 crore over 8 years. The Nifty Smallcap 250’s 9.1% CAGR generated only ₹2.00 crore. The difference? Nifty 50 had fewer periods of deep drawdown and valuation compression. It compounded more smoothly.
In investing, consistency is often underrated. A 10% return every year compounds better than a 15% return some years and a 0% return other years.
Lesson 3: Segments Matter Less Than Valuations
The decision to invest in “large caps” versus “small caps” is less important than the decision about when you’re buying them. A cheap large cap is better than an expensive small cap—which is precisely what we observed from 2018 to 2026.
Market cycles are real. Respect them.
As fiduciaries managing other people’s capital, this is what keeps us focused: not chasing segments, but hunting valuations. Not following the crowd into yesterday’s winners, but identifying tomorrow’s opportunities while they’re still unloved.
Your capital deserves that discipline.
Key Takeaways
- Nifty 50 (Large Caps): ₹1 Cr → ₹2.40 Cr | 10.6% CAGR
- Nifty Midcap 150 (Mid-Caps): ₹1 Cr → ₹2.80 Cr | 11.8% CAGR
- Nifty Smallcap 250 (Small-Caps): ₹1 Cr → ₹2.00 Cr | 9.1% CAGR
