Smaller is healthier. At the very least that’s what many traders consider with regards to fairness investing in India.
And the info does appear to help this view. Over the past 20 years, mid and small cap indices have delivered considerably greater returns than Nifty 50. Properly, a minimum of on the floor.
However is it actually that straightforward? Does going smaller at all times imply greater returns? And extra importantly, are you able to deal with the experience?
What Does This Publish Cowl?
On this put up, allow us to evaluate the efficiency of 8 cap-based indices during the last 21 years (April 1, 2005, to March 31, 2026). I’ve thought-about the Worth index (and never the Complete Returns index) for the evaluation. Have thought-about 250-day 12 months for evaluation on this put up. We are going to take a look at calendar 12 months returns, CAGR, rolling returns, and danger metrics to grasp how these indices have truly behaved.
The 8 cap-based indices thought-about for this evaluation:
- Nifty 50
- Nifty 100
- Nifty 500
- Nifty Giant & Midcap 250
- Nifty Subsequent 50
- Nifty Midcap 150
- Nifty Smallcap 250
- Nifty Microcap 250
Disclaimer: I’ve used Claude AI extensively for this efficiency evaluation. Whereas I’ve performed a couple of pattern checks and the findings look nice directionally, it might nonetheless comprise inaccuracies. Please do additional analysis or seek the advice of your funding adviser earlier than performing on the knowledge shared on this put up.
The Fundamentals: How Are These Indices Completely different?
Earlier than we get to the numbers, a fast refresher.
Nifty 50 tracks the 50 largest corporations by market capitalization. Nifty 100 extends this to the highest 100. Nifty 500 is a broad market index protecting the highest 500 corporations. Nifty Giant & Midcap 250 combines the highest 100 massive caps and the following 150 midcaps. Nifty Subsequent 50 tracks corporations ranked 51-100 by market cap. Nifty Midcap 150 covers corporations ranked 101-250. Nifty Smallcap 250 covers corporations ranked 251-500. And Nifty Microcap 250 goes even additional down the market cap spectrum.
Observe that as you progress down the market cap ladder, you’re primarily investing in smaller and fewer liquid corporations. As an investor, the expectation is that you just get compensated for this extra danger via greater returns. However does the info help this? Let’s discover out.
Calendar 12 months Returns
Take a look at the common calendar 12 months returns throughout these 21 years. Nifty 50 delivered 14.8%. Nifty Midcap 150 delivered 21.2%. And Nifty Microcap 250 delivered 26.2%. The sample is evident. Smaller the shares, greater the common returns.
However now take a look at the person years. In 2008, Nifty 50 fell 51.8%. Nifty Smallcap 250 fell 69.1%. Nifty Microcap 250 fell 75.2%. In 2018, Nifty 50 was up 3.2% whereas Nifty Microcap 250 was down 27.7%. And in 2011, Nifty 50 fell 24.6% whereas Nifty Microcap 250 fell 41.6%.
The experience will get considerably rougher as you go smaller, proper?
Within the good years, the smaller indices ship wonderful returns. In 2009, Nifty Subsequent 50 delivered 127.9%. Nifty Microcap 250 delivered 118.4%. In 2014, Nifty Microcap 250 was up 103.3%. And in 2007, Nifty Smallcap 250 was up 94.9%.
Good years are nice, however throughout the funding journey, dangerous years matter too.
Consolidated Efficiency: The place the Actual Story Lies
Common Returns vs CAGR: Thoughts the Hole
The typical calendar 12 months return for Nifty Microcap 250 is 26.2%. However the CAGR is barely 15.2%. That’s a large hole of about 11 proportion factors.
For Nifty 50, the common return is 14.8% and the CAGR is 12.1%. The hole is barely about 2.7 proportion factors.
Why does this occur? Due to volatility drag. The extra unstable the returns, the bigger the hole between common returns and CAGR. Therefore, whereas the common returns for smaller indices look spectacular, the precise wealth creation (captured by CAGR) will not be as dramatic because it seems.
Rs 100 Grows To…
Should you had invested Rs 100 in April 2005, right here’s what it might have turn out to be by March 2026:
- Nifty 50: Rs 1,080
- Nifty Midcap 150: Rs 1,943
- Nifty Smallcap 250: Rs 1,429
- Nifty Microcap 250: Rs 1,889
Nifty Midcap 150 truly created extra wealth than Nifty Microcap 250. Sounds a bit unusual. Doesn’t it? Regardless of Microcap 250 having greater common returns. That is the volatility drag at work.
Danger: The Uncomfortable Reality
Nifty 50 has a typical deviation of 20.7% and a most drawdown of -59.9%.
Nifty Microcap 250 has a typical deviation of 23% and a most drawdown of -82.3%. An 82% fall means your Rs 1 lac turns into Rs 17,700. And you then want a 449% rise simply to get again to the place you began.
Now to the Sharpe ratio (danger adjusted returns). Larger the higher.
Nifty Midcap 150 has the very best Sharpe ratio at 0.45. Nifty 50 has the bottom at 0.29.
Nifty Small Cap 250 at 0.35. Nifty Microcap 250 sits at 0.40, decrease than Midcap 150.
Rolling Returns: Consistency Issues
Rolling returns provide you with a way of consistency.
To me, the shock half is that Nifty Small Cap 250 shedding out to Nifty Midcap 150 over 80% of the time in 5-year rolling returns. 70% in 3-year rolling returns.
You’d have anticipated Nifty Small Cap 250 to beat Nifty Midcap 150 over the long-term. In any case, it has even smaller shares. It does appear to outperform point-to-point over 21 years, in the event you take a look at simply the common calendar 12 months returns. Nevertheless, whenever you take a look at the CAGR, rolling returns and so forth., the small cap index falls behind fairly a bit.
And that’s not it. On 5-year rolling returns, Nifty Smallcap 250 beat Nifty 50 solely about 48.9% of the time. Lower than half. So, regardless of the upper common returns, in the event you had invested in Nifty Smallcap 250 for any random 5-year interval, there was likelihood Nifty 50 would have performed higher.
How do you utilize this data?
- Don’t belief the info blindly. There could also be errors in my evaluation.
- The intent of this put up is NOT to exhibit superiority of 1 index over one other. And also you also needs to NOT evaluate this evaluation on this context. You don’t should be the most effective to be completely happy.
- Don’t simply give attention to the returns. I’ve proven long-term knowledge. Therefore, for among the indices, the long-term knowledge could look very spectacular. Firstly, previous efficiency doesn’t assure future efficiency. Secondly, the long-term knowledge often seems to be fairly easy. It’s going to conveniently cover the unstable journey {that a} specific index would have taken you thru. Or reasonably you are likely to ignore these facets and focus merely on the returns. Lengthy-term, for many traders, is only a sequence of short-term investments. Therefore, earlier than contemplating any of the indices chosen for this put up, you have to look past the returns knowledge as effectively.
- Conviction in an funding technique is vital. No funding technique, irrespective of how good, works on a regular basis. No funding technique, irrespective of how dangerous, fails on a regular basis. The ups and downs will check your endurance. Should you lack conviction, you’ll largely possible leap the ship on the fallacious time.
- Concentrate on constructing a low-cost diversified long-term portfolio.
The Caveats
- Previous efficiency (or outperformance) doesn’t assure future efficiency (outperformance).
- Whereas I’ve thought-about the info from April 1 2005, many of those indices had been launched a lot later. Therefore, the outperformance by these issue indices could merely be a results of back-fitting. I wrote a put up in early 2025 the place I in contrast the efficiency of issue indices since launch.
- I’ve proven returns for indices. You don’t spend money on indices. You spend money on index funds or ETFs. Such merchandise could have monitoring distinction for numerous causes and can decrease your returns. The monitoring distinction could improve if the underlying shares are much less liquid.
Supply
Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM by no means assure efficiency of the middleman or present any assurance of returns to traders. Funding in securities market is topic to market dangers. Learn all of the associated paperwork rigorously earlier than investing.
This put up is for training objective alone and is NOT funding recommendation. This isn’t a suggestion to speculate or NOT spend money on any product. The securities, devices, or indices quoted are for illustration solely and should not recommendatory. My views could also be biased, and I’ll select to not give attention to facets that you just think about vital. Your monetary targets could also be totally different. You might have a unique danger profile. You might be in a unique life stage than I’m in. Therefore, you have to NOT base your funding choices based mostly on my writings. There isn’t any one-size-fits-all resolution in investments. What could also be funding for sure traders could NOT be good for others. And vice versa. Subsequently, learn and perceive the product phrases and circumstances and think about your danger profile, necessities, and suitability earlier than investing in any funding product or following an funding method.