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Tuesday, June 25, 2019

BSE Small Cap Index & Sensex - Yearly Returns since 2003

BSE Small Cap Index & Sensex - YoY Returns starting April 2003

Small Cap stocks are known to deliver impressive performance when bulls rule the markets, but they get battered during a bearish regime. For instance in 2009, Sensex was one of the best performing markets vis-a-vis its peers. This was on account of the positive impact of the stimulus released by the Government and the election results, which led to confidence among investors and corporate India that a stable government at the centre will be able to bring in a lot of reforms. This saw the index posting a superb return of 81% while the BSE Small Cap Index actually delivered an impressive 123% during the same time horizon.

This could be attributed to the fact that during market upturns small cap companies normally outperform their larger peers, since the latter would have already reached their peak in terms of the potential to grow in the future, while the former actually gets to unlock its growth potential as there is a long way for them to reach the maturity stage.

Below is the table illustrating the % returns delivered by Sensex as well as BSE Small Cap Index every calendar year since 1st April 2003.
BSE Small Cap Index and Sensex YoY Returns
Similarly, if we look at performance of various indices in 2014, Sensex has given returns of 29.9%, however BSE Small Cap Index has given whopping returns of 68.8% during the same period. In fact, 2014 was one of the best year for small cap companies after 2009 as many little known companies with good fundamentals turned multibagger during this year itself. In fact, many of our recommended stocks in 2011, 2012 and 2013 like Cera Sanitaryware, Wim Plast, Acrysil, Kovai Medical, Mayur Uniquoters, TCPL Packaging, Camlin Fine Sciences etc turned 4-Bagger to 10-Bagger stocks during 2014 and 2015.

Looking at current scenario, Sensex has made all time high of 40,312 recently on 4th June and closed at 39,435 today. However, Small Cap Index closed at 14,109 today and is still down by almost -30% from its all time high of 20,183 made on 15th Jan 2018. Money has moved from small caps to very selected large caps during last 1.5 years, this has pushed the Sensex to life time high leaving small cap companies to their 52 week lows. Negative sentiments towards small caps have  not only brought down companies with poor fundamentals down but also the fundamentally good businesses at historically low valuations. Hence, buying right set of small caps with robust business fundamentals now can be an excellent wealth creating multibagger opportunity in long run.


Those who wish to invest in small-cap stocks should do so only if they have a long investment horizon and tolerance for volatility. Small-cap stocks suffer the steepest falls in a bear market and rise the most in a bull market. An investor should stay invested for at least three-five years to allow their portfolio to gain from at least one bull run. If you are looking for multibaggers, stock must have high growth rates along with expanding PE ratios. The price we pay for the stock is important as it will determine whether there is enough scope left for a PE expansion to take place. 

Benefits of Investing in Small Caps

1. Huge growth potential: The first and the most important advantage that a small cap stock gives you is their high growth potential. Since these are small companies they have great scope to rise as opposed to already large companies.

2. Low Valuations: Usually small cap stocks are available at lower valuations compared to mid & large caps. Hence, if you invest in good small cap companies at initial stage and wait for couple of years,  you will see price appreciation not only because of growth in top line and bottom line but also due to rerating which happens with increase in market capital of the company.

3. Early Entrance Advantage: Most of the fund house and institutions do not own small caps with low market cap due to less liquidity which make it difficult for them to own sufficient no. of shares. This gives retail investors an opportunity to be an early entrant to accumulate such companies shares. When company grows in market cap by delivering consistent growth and becomes more liquid, entry of fund houses and institutions push the share prices up giving maximum gains to early entrants.  

4. Under–Researched: Small cap stocks are often given the least attention by the analysts who are more interested in the large companies. Hence, they are often under - recognized and could be under-priced thus giving the investor the opportunity to benefit from these low prices.

5. Emerging Sectors: In a developing economy where there are several new business models and sectors emerging, the opportunity to pick new leaders can be hugely beneficial. Also the disruptive models in the new age is leading to more churn and faster growth amongst the nimble footed smaller companies.

Concerns while Investing in Small Caps

1. Risk: The first and the most important disadvantage a small cap stock is the high level of risk it exposes an investor to. If a small cap company has the potential to rise quickly, it even has the potential to fall. Owing to its small size, it may not be able to sustain itself thereby leading the investor into great loses. After all, the bigger the company, the harder it is for it to fall.

2. Volatility: Small cap stocks are also more volatile as compared to large cap stocks. This is mainly because they have limited reserves against hard times. Also, it in the event of an economic crisis or any change in the company administration could lead to investors dis-investing thereby leading to a fall in prices.

3. Liquidity: Since investing in small cap stocks is mainly a decision depending upon one’s ability to undertake risk, a small cap stock can often become illiquid. Hence, one should not depend upon them for an important life goal.

4. Lack of information: As opposed to a large cap company, the analysts do not spend enough time studying the small cap companies. Hence, there isn’t enough information available to the investor so that he can study the company and decide about it future prospects.

Tide to turn favourable for Small Cap Stocks

If you analyse the bear phase of stock markets cycle since 1990, you will find that such bear phase has not lasted for more than 18 months. Small cap index which made all time high of 20,184 in Jan 2018 with end of its bull run corrected by -35% from its peak in Feb 2019 and we believe bottom in broader markets is already in place with lows made in Feb 2019 post Pulwama attack.

Moreover, whenever BSE Small Cap Index has delivered significantly high negative returns in a particular year during last 16 years, it has delivered double digit positive returns the very next year. The divergence between Sensex / Nifty and BSE Small Cap & Mid Cap Index will not last for long going forward considering valuations gap emerging between large caps in comparison to mid & small cap stocks.

Greed which was seen in broader market (small & mid caps) in the year 2016 and 2017 has turned to fear these days. This is the time to do opposite of the herd, its time to be greedy when others are fearful. If you are not investing in equities during these opportune times and taking the back seat, you are making a bigger mistake.


Remember, in the long run, you do not make decent returns on your investments by following the herd i.e. when everyone is buying stocks; instead you get handsome returns on our investments by investing in stocks at significantly low prices as no one else is buying, and by selling to them when they come back in herd due to greed in future.


Be a disciplined investor who keep on investing in systematic way irrespective of market conditions and not an emotional investor who usually buy stocks during bull phase when stock prices are moving higher because of greed and sell them in panic during bear phase due to severe fall in stock prices, making mistake of buying high and selling low.

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