Smallcap stocks are back in action again. Should you ride the wave?
After a shaky start earlier this year, smallcap stocks are back in the spotlight, racing ahead like they've got a point to prove. The smallcap space has come roaring back, outpacing the Nifty by a wide margin and pulling investor attention away from large, slow-moving bluechips.Since the market's low in February 2025, the Nifty 50 index has risen by 12%. But the real jump has been in the mid and smallcap space. The midcap index has gone up by 20%, and the smallcap index has climbed 22% during the same period.In just the last month, smallcaps have continued to lead the market. According to Axis Securities, 'The Smallcap index went up by 9.6% and the Midcap index by 6.1%, while the benchmark index, Nifty50, inched up marginally by 1.7%.'Axis Securities listed five key reasons behind this rally: earnings for the fourth quarter of FY25 were in line with what was expected, trade relations between countries improved, there was some relief on the geopolitical front, macroeconomic indicators for FY26 looked strong, and investors showed more interest in taking risks.SMALLCAPS LEAD THE RALLYThe BSE Smallcap Index has jumped 21% in the past three months. In comparison, the Nifty 50 has gained 12% during the same time. Some smallcap stocks have given very high returns.For example, NACL Industries has shot up by 192%, and Garden Reach Shipbuilders (GRSE) has gone up 147%. Other stocks such as Suven Life, Centum Electronics, Cosmo First, Bharat Dynamics, Zen Tech, and Mangalore Chemicals have either doubled or come close.Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments, said, 'All the action is in the mid and smallcap space in response to the results.' However, he warned that 'investors should not chase mid and smallcaps without any concern for valuations.' He added that 'quality mid and smallcaps have the potential to outperform.'WHAT INVESTORS NEED TO KNOWSmallcap stocks are known for their ability to rise quickly, but they can also fall just as fast. After a strong rally like this, experts are advising caution. While the recent gains are impressive, many believe investors should not just follow the trend blindly.'Small-cap stocks are back in focus, and they have outperformed the broader market in recent weeks,' said Trivesh, COO at Tradejini.He pointed out that while the Nifty fell 0.41% over the last week, the smallcap index gained 1.36%. From its April low, the smallcap index has recovered nearly 26%.At the same time, Trivesh said investors should not get carried away. 'Not all small caps are created equal,' he said. 'The recent correction in momentum-heavy portfolios has been a clear signal, chasing hype without looking at earnings strength can hurt.'He believes India's growth story remains strong, and smallcap stocks will be a part of that. But he also highlighted the need for a careful approach.'It is less about riding the wave and more about finding companies that can actually deliver on the ground,' he said. 'Focus on quality, sustainability of profits, and strong fundamentals. That is what will separate the winners from the rest in this space going forward.'advertisement(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)
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