Indian equities as an asset class, but more so for mid and smallcaps. Despite the volatility of international uncertainty and geopolitical tensions, Indian markets stood strong. While Nifty 50 returned 20%, mid and smallcaps were in excess of 40%.
The year of the bulls, 2023 was marked by stabilized interest rates and heavy government PLI schemes, among other macroeconomic factors.
More importantly, the disproportionate amount of net inflows pumped into these stocks by the domestic mutual funds industry is astounding.
The last year began with large-cap funds receiving the most inflows, but the tide turned in favor of smaller companies pretty quickly. Coupled with the greater inflows in small caps and the low float of these companies, we get a deadly combination of P/E expansion. Because more money chases the fewer available stocks, prices shoot up on the back of increased P/E.
Case in point — Nifty Smallcap 250 P/E expanded from 19.04 to 27.37 in the last year. This means that of the ~49.1% return that the index gave, ~43.8% of it came from P/E expansion only.
While years like 2023 highlight how great mid/small-cap exposure can be in your portfolio, we can also fall prey to being myopic in our decision-making. After all, your investment portfolio is meant to serve you for years, if not decades, and making changes based on just the past year's performance can be foolish.
Therefore, we decided to conduct this meta-analysis on the mid/small-cap space, taking data back to April 2005, spread across 7 different indices in this space for metrics across risk and return.