Indian equities have once again scaled record levels, with both the Nifty 50 and the Sensex touching all-time highs. While this surge reinforces the long-term strength of the domestic market, it has also raised an important question for investors: should one turn cautious on small and mid-cap stocks at these elevated levels, and what does the return outlook look like going ahead?
The recent performance trends offer valuable clues. In November, the Nifty 50 rose by nearly 2%, but the BSE Midcap index remained flat and the BSE Smallcap index slipped into negative territory. This divergence indicates that the broader rally is becoming more selective, with leadership shifting toward the large-cap universe.
A major factor behind this shift is valuation. Mid and small caps are currently trading meaningfully above their long-term averages. Elevated valuations inherently make these segments more vulnerable to corrections, heightened volatility, and near-term disappointment. When prices run ahead of fundamentals, even minor earnings misses or macro shocks can lead to sharp drawdowns.
It is also important to examine the underlying earnings trajectory. While mid and small-cap companies are expected to show stronger earnings recovery in FY27, the gap between current valuations and earnings visibility remains significant. Earnings still have considerable ground to cover before they can justify today’s pricing. This combination—stretched valuations and a lagging earnings base—calls for a degree of caution from investors in the near to medium term.
This does not imply that the long-term story of small and mid caps is broken. Rather, it suggests that return expectations should be moderated. The past five-year period has been exceptionally strong for these categories, but much of that performance stems from a low-base effect. As Prashant Jain highlighted in a recent interview, the extraordinary returns seen in small and mid caps were largely a result of the steep falls during the Covid period.
During the Covid crash, large caps fell around 30–40%. In contrast, mid and small caps collapsed by 60–80%, pushing valuations to multi-year lows. Liquidity dried up, earnings visibility vanished, and investors aggressively sold down these higher-beta segments. As the economy reopened, revenues normalised, margins recovered, and operating leverage magnified earnings growth. At the same time, domestic liquidity surged through SIPs, DIIs, and a wave of retail enthusiasm.
When valuations rise from extremely depressed levels and meet strong earnings recovery, percentage returns appear exceptionally high. But these returns were more of a bounce-back from distressed levels than a new structural norm. This is why investors should be careful about extrapolating the past five years into the future. Going ahead, returns in small and mid caps will be primarily driven by fundamentals, earnings quality, and disciplined valuations—not by base effects.
Another key question is: why did mid and small caps overshoot their fair valuations so dramatically? The answer lies in a combination of factors. Post-Covid, earnings recovery in smaller companies was sharp and broad-based. But more importantly, liquidity flooded the system. SIP inflows consistently hit record highs, mutual funds increased allocations, and HNIs and new-age investors chased high-growth, high-beta names.
Momentum soon took over. In markets, once momentum builds, price rallies can extend well beyond justified fundamentals. Retail flows amplified the rally, but they were not the sole driver. The real re-rating came from system-wide liquidity and the strong post-Covid earnings rebound, with retail participation adding fuel to an already strong trend.
With valuations stretched and momentum cooling, investors are now reassessing their allocation strategies. This naturally leads to the next question: why do large caps appear better placed for long-term returns today?
Large caps have clearly taken the lead in 2025 so far. The rally in this space is driven by a narrow set of high-quality companies with strong fundamentals, institutional ownership, and earnings predictability. In contrast, mid and small caps are battling valuation pressure and the need for a more broad-based earnings recovery. Large caps also attract institutional flows—FIIs and DIIs tend to move in and out of these companies in large volumes—which provides stability, liquidity, and resilience during volatile phases.
From a long-term perspective, large caps have historically delivered more consistent and robust returns. Many of the best-performing large-cap funds have generated 19–20% annualised returns over 3- and 5-year periods—highlighting the strength of steady compounding when backed by quality and scale.
Conclusion
As markets hit new highs, investors should rebalance expectations and potentially their portfolios. Small and mid caps are not unattractive, but they require selective allocation, patience, and valuation discipline. Given the current market setup—elevated pricing, slowing momentum, and uneven earnings recovery—large caps offer a more favourable risk-reward profile over the medium to long term.
A balanced approach, incorporating quality large caps with selectively chosen mid and small caps, remains the optimal path for long-term wealth creation.
Market this week
| 16th Nov 2025 (Open) | 21st Nov 2025 (Close) | %Change | |
| Nifty 50 | ₹ 26,123 | ₹ 26,203 | 0.3% |
| Sensex | ₹ 85,320 | ₹ 85,707 | 0.5% |
Source: BSE and NSE
- Indian equity markets extended their gains for the third straight week, closing the week of November 28 on a firm note despite largely range-bound trading conditions.
- Sentiment remained mixed as investors monitored India–US trade negotiations, developments around a potential Russia–Ukraine ceasefire, and movements in the rupee, while also factoring in expectations of a possible rate cut by the Fed and RBI in December.
- On the sectoral front, pharma, media, PSU banks, private banks, metals, and IT indices posted moderate advances of around 1–2%, reflecting broad-based buying interest across multiple pockets.
- Meanwhile, defence and oil & gas counters saw mild pressure, each ending the week with roughly a 1% decline.
- In terms of flows, FIIs remained net sellers, offloading equities worth ₹3,659 crore, whereas DIIs continued to support the market, recording strong net purchases of ₹22,762.62 crore
Weekly Leaderboard
| NSE Top Gainers | NSE Top Losers | ||||
| Stock | Change (%) | Stock | Change (%) | ||
| Hindalco Industries | ▲ | 3.9% | Adani Enterprises | ▼ | -5.9% |
| Tech Mahindra | ▲ | 3.8% | Bharti Airtel | ▼ | -2.8% |
| Shriram Finance | ▲ | 3.4% | SBI Life | ▼ | -2.8% |
| Bajaj Finance | ▲ | 3.3% | Power Grid Corp | ▼ | -2.7% |
| Sun Pharma | ▲ | 2.9% | Trent Ltd | ▼ | -2.5% |
Source: BSE
Stocks that made the news this week:
Hindustan Zinc rallied over 3% as a surge in silver prices lifted sentiment around the stock, which traded near ₹489. The stock has now gained close to 8% over four sessions and remains one of the top performers within the Nifty Metal index. Silver prices have been strengthening due to firm industrial demand, tightening supply conditions, and expectations of a US rate cut—factors that generally influence precious metals more than corporate earnings trends.
Shares of One97 Communications, the parent company of Paytm, advanced more than 3.5% after Goldman Sachs turned bullish on the stock. The brokerage upgraded Paytm to a “Buy” rating and sharply raised its target price to ₹1,570, implying strong potential upside. Goldman Sachs pointed to an improving regulatory backdrop, recovering payments market share, and enhanced earnings visibility as key reasons for the upgrade.
LIC trimmed its holding in NBCC (India) to 4.48%, reducing its stake from the earlier 6.55% through a series of sales undertaken between April 2018 and November 2025. Despite this partial exit, the company remains majority-owned by the Government of India, which holds around 61.75% as per the latest disclosures. In a parallel move, LIC has added to its position in ACC by purchasing an additional 2% stake.
