Large, mid or small caps? Here's 2026 playbook post SMIDs' underperformance

As investors recalibrate their portfolios heading into the new calendar year 2026 amid uneven market performance, analysts are urging caution on mid- and small-cap stocks and advising a tilt towards large-caps.  Further, with earnings divergence, valuation concerns, and risk aversion shaping flows in the Indian stock markets in 2025, they say large-cap stocks remain better positioned to deliver steadier returns ahead, while exposure to smaller companies should remain measured and selective.

 

Kush Gupta, Director at SKG Investment and Advisory, for instance, suggests that balanced investors may have an equity-only mix of 55-65 per cent in large-cap stocks, 25-30 per cent in mid-cap stocks, and 10-15 per cent in small-cap stocks in 2026.

 

   

"Aggressive investors, with a five- to seven-year horizon, however, may consider increasing exposure to mid- and small-cap stocks, with large-caps at 45-55 per cent, mid-caps at 25-35 per cent, and small-caps at 15-25 per cent," he said.

 

The cautious and selective optimism in mid- and small-cap stocks, analysts said, comes amid anticipation that outright strong returns may not be visible for the pack in 2026. However, if markets move towards stabilisation and potential recovery, driven by earnings momentum strengthening and liquidity preferences broadening beyond large-caps, SMIDs could see better returns.

 

Resolution of uncertainties around US tariff policies could act as a key catalyst, leading to a faster and broader recovery in the small-cap segment, Mayur Shah, Head of PMS and Fund Manager at Anand Rathi Advisors, noted. 

On the bourses, the Nifty SmallCap index has declined 7 per cent so far this year (CY25), the most since the 14-per cent fall in CY-2022, as against a 10 per cent rise in the benchmark Nifty50 index in 2025.  

 

Further, the NSE 500 index has trailed the benchmark Nifty50 index by the most since 2019, according to Bloomberg data. Tejas Networks, Praj Industries, and Ola Electric were the top losers this year, down up to 62 per cent.

 

The midcap gauge, Nifty MidCap 100, meanwhile, has risen by 5 per cent this year.

 

In this backdrop, a portfolio allocation of 30 per cent to large-cap stocks, 20 per cent each to mid- and small-cap stocks, and the remaining 30 per cent split equally between gold and silver strikes a balance between long-term growth and risk control, believes Harsh Thakkar, research analyst at SAMCO Securities.

 

"The allocation to small-cap stocks allows participation in higher-growth opportunities, though selectivity is critical given higher volatility," he advised.

 

According to him, the broader markets lagged benchmarks this year largely because investor focus concentrated on large, liquid stocks amid risk aversion and earnings divergence. Smaller companies, he said, delivered weaker earnings growth compared to large-caps, discouraging new money and prompting reallocation into safer, well-established stocks.  CATCH STOCK MARKET LIVE UPDATES TODAY

Valuations reset

On the valuation front, analysts believe valuations of select small-cap stocks have fallen into comfortable zone after 2025 a massive drubbing even as the Nifty SmallCap index is down 10 per cent from its peak level.

 

"We believe that the risk-reward in select small-cap stocks has turned very attractive as the fall at the index level does not fully represent the carnage in individual stocks," Sonal Minhas, founder, Prescient Capital, said.

 

 The median fall from their all-time high valuations for small-cap stocks has been about 33 per cent, making them selectively attractive.

 

Kush Gupta of SKG Investment & Advisory, however, noted that small-cap valuations have not fully reset due to 'growth' pricing, with excess pockets still existing.

 

Elevated multiples with weak recent returns indicate de-rating happened mainly through price declines this year. But, this is not enough to make the segment broadly cheap, especially if earnings growth normalises, he added.