A significant portion of India’s small-cap universe is currently trading well below previous highs, potentially offering investors an opportunity to build long-term allocations at more reasonable valuations, according to a study by Abakkus Mutual Fund.
" 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," noted the study.
The study found that nearly 50% of small-cap stocks — with market capitalisation between ₹2,000 crore and ₹34,700 crore — are trading about 40% below their all-time highs, reflecting the impact of recent market corrections and valuation resets.
Such market resets often create entry opportunities for investors seeking exposure to high-growth companies at more sustainable prices ahead of the next market cycle.
"“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’ growing role in the market
The small-cap segment has expanded rapidly in recent years. Between 2019 and 2025, the market capitalisation of small-cap companies grew from ₹16 trillion to ₹83 trillion — a 5.3-times increase, outpacing the growth seen in large-cap (2.55x) and mid-cap (3.89x) companies.
As a result, small-caps now account for 19% of India’s equity market capitalisation, up from 11% in 2019, highlighting their rising importance in the broader market ecosystem.
This expansion reflects the increasing number of emerging businesses and sectors listed in the small-cap category, many of which are shaping India’s next phase of economic growth.
Exposure to sunrise sectors
Small-cap companies offer exposure to several emerging industries that remain under-represented in large-cap indices, including:
Aerospace and defence
Pharmaceuticals and biotechnology
Electronics manufacturing services
Electric vehicles and batteries
Artificial intelligence-led services
Renewable energy
Medical devices
Travel and tourism
Auto components
This sectoral diversity makes small-caps an important allocation for investors looking to participate in innovation-driven growth themes.
Long-term performance remains strong
Despite higher volatility, small-caps have historically delivered stronger long-term returns compared to large-caps.
The study shows that SIP investments in the Nifty Smallcap 250 index generated a CAGR of about 17% since September 2016, compared with 12% for the Nifty 50.
Over three- and five-year periods as well, the small-cap index outperformed the benchmark large-cap index, reinforcing the importance of staying invested through market cycles rather than attempting to time them.
What it means for investors
The correction in small-cap stocks does not necessarily signal weakness in the segment. Instead, it reflects a normal market cycle following strong gains in recent years.
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.
A significant portion of India’s small-cap universe is currently trading well below previous highs, potentially offering investors an opportunity to build long-term allocations at more reasonable valuations, according to a study by Abakkus Mutual Fund.
" 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," noted the study.
The study found that nearly 50% of small-cap stocks — with market capitalisation between ₹2,000 crore and ₹34,700 crore — are trading about 40% below their all-time highs, reflecting the impact of recent market corrections and valuation resets.
Such market resets often create entry opportunities for investors seeking exposure to high-growth companies at more sustainable prices ahead of the next market cycle.
"“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’ growing role in the market
The small-cap segment has expanded rapidly in recent years. Between 2019 and 2025, the market capitalisation of small-cap companies grew from ₹16 trillion to ₹83 trillion — a 5.3-times increase, outpacing the growth seen in large-cap (2.55x) and mid-cap (3.89x) companies.
As a result, small-caps now account for 19% of India’s equity market capitalisation, up from 11% in 2019, highlighting their rising importance in the broader market ecosystem.
This expansion reflects the increasing number of emerging businesses and sectors listed in the small-cap category, many of which are shaping India’s next phase of economic growth.
Exposure to sunrise sectors
Small-cap companies offer exposure to several emerging industries that remain under-represented in large-cap indices, including:
Aerospace and defence
Pharmaceuticals and biotechnology
Electronics manufacturing services
Electric vehicles and batteries
Artificial intelligence-led services
Renewable energy
Medical devices
Travel and tourism
Auto components
This sectoral diversity makes small-caps an important allocation for investors looking to participate in innovation-driven growth themes.
Long-term performance remains strong
Despite higher volatility, small-caps have historically delivered stronger long-term returns compared to large-caps.
The study shows that SIP investments in the Nifty Smallcap 250 index generated a CAGR of about 17% since September 2016, compared with 12% for the Nifty 50.
Disclaimer: For Monthly SIP Returns, it is assumed that the investments are made on first day of the month, beginning from 1st September 2016 to 31st January 2026.)
Over three- and five-year periods as well, the small-cap index outperformed the benchmark large-cap index, reinforcing the importance of staying invested through market cycles rather than attempting to time them.
What it means for investors
The correction in small-cap stocks does not necessarily signal weakness in the segment. Instead, it reflects a normal market cycle following strong gains in recent years.
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.
"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 Vaibhav Chugh.
 "Nearly 50% of small-cap stocks trade below peaks, opening allocation window")
