Are small-cap stocks in a bubble? Experts tell you how to trade in smaller companies

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Midcap index has gained 25 per cent. The BSE Sensex, on the other hand, has gained just 8 per cent in the same period. Data show that about 75-odd stocks of the BSE Smallcap index have jumped over 100 per cent this year so far.

Smallcap stock Jai Balaji Industries, which has a market cap of about ₹4,675 crore as of September 4, has surged by 451 per cent this year so far. The sharp rise in the smallcap space can be attributed to healthy buying by foreign portfolio investors (FPIs) after the Q1 numbers. They may still rise for some time as the valuations of some of these companies are still lower.

“Smallcaps have been doing well as FPI flows are largely positive, HNIs have tasted blood in these stocks over the past few weeks and hence are bringing in fresh funds, Q1 results of these companies were either in line or better than expectations as business volumes keep shifting from unorganised to organised sectors," said Deepak Jasani, Head of Retail Research, HDFC Securities. “Valuations of some of these companies are still lower than their midcap or large-cap peers. The absence of any large sell-off in the markets lasting more than a couple of days means that investors are not in a hurry to take profits and tend to overlook temporary overvaluations," said Jasani.

Anita Gandhi, Director at Arihant Capital pointed out that smallcap stocks often outpace GDP growth in a growing economy, making them attractive to investors seeking higher returns. Additionally, Gandhi added, sustained foreign fund inflows and anticipation of a favourable earnings quarter have boosted interest in equities, particularly in the small-cap segment. This renewed investor confidence and positive sentiment are driving the upward trajectory of small-cap