Small stocks are racing ahead, but beware the risks

livemint.com:

Mint analysis. This is more than three times the returns generated by the group with the highest market capitalization (m-cap). The analysis is based on m-cap data of over 2,400 listed companies as on 2 May 2018, which are segregated into seven different groups based on their size.

Note that the six-year period saw a bear phase for the first two years and a bull run for the next four years which continues till date. The six years has been chosen to allow the investments sufficient time and also, not stretch too long. The analysis does not cover companies listed after 2 May 2018.

Smallcaps are stocks that have an m-cap of less than ₹30 crore in the base year, 2018. There are a total of 418 such companies. The analysis shows a clear pattern of declining returns as the m-cap of companies increases.

While the annual returns stand at 50% for the less than ₹30 crore group, it declines to 32% for those with ₹30 crore to ₹100 crore, further to 22% for the next group, and so on. The largest group with m-cap of over ₹50,000 crore each, having 63 companies, generated the lowest aggregate return of 14.5%. Remarkably, returns for the three years also show the same pattern with 111% and 62% for the smallest two groups, coming down to 17% for the largest group.

On the flip side, however, penny stocks have also shown the highest variation in annual return ranging from -56% in 2020 to 189% in 2021. In contrast, the variation has ranged between -17% and 56% for the highest m-cap group, which means lower rewards but also lower risk. The variation is captured in the statistical term, standard deviation, which measures the movement of annual returns away from the average value.