Beaten-down small-caps begin to tempt mutual funds

Subscribe to enjoy similar stories. The relief rally in small-cap stocks appears to have opened bargain hunting windows for mutual funds that recently avoided investments in new scrips in this segment, as beaten-down stocks begin to look more appealing. Small-caps chased by retail investors over more than two years plunged nearly 24% from their most recent highs, before a rally over the last three days limited losses to 20%.

However, it remains to be seen whether this momentum will continue and if the correction is truly over. Also read | Smallcap survivors: These sectors weathered the market correction The small-cap rally over the last two to three years was largely driven by excess liquidity and a heightened risk-on sentiment, noted Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research. The BSE Smallcap Index surged over 28% in 2024 and an impressive 47% in 2023.

But these stocks are now in bear market territory, and have shed 16.6% in 2025 alone. The fall in valuations may trigger bargain hunting by professionally-run schemes which had adopted a wait-and watch approach, experts said. Anirudh Garg, partner and fund manager at Invasset PMS said the recent correction has certainly led to a more compelling valuation landscape in the small-cap segment, offering selective opportunities for long-term investors.

With market conditions becoming uncertain, fund managers are focusing on small-cap companies with robust earnings growth and attractive valuations rather than chasing speculative gains, Nuvama's Pagaria said. This tempered approach represents a notable departure from the high-risk, high-reward strategy that previously defined small-cap fund management. Also, since incremental flows into small cap funds