India’s small-cap stocks are currently trading at more than 40% below their peaks, according to a study conducted by Abakkus Mutual Fund. The research found that half of the small-cap stocks—those with market capitalizations between INR 2,000 crore and INR 34,700 crore—have experienced significant declines, raising concerns for investors who bought these stocks near their highs.

Volatility and Risk in Small-Cap Investing

Small-cap stocks are inherently more volatile than mid-cap and large-cap stocks, often reacting more sharply to macroeconomic trends, news, and market fluctuations. When the broader market rises, small-cap stocks can surge more rapidly, but when the market declines, they tend to fall more steeply. This volatility is compounded by lower trading volumes and the concentration of share ownership among promoters and large shareholders, which can make it difficult for investors to buy or sell without significantly affecting stock prices.

According to AI analysis, small-cap companies face additional challenges such as limited analyst coverage, less media attention, and higher compliance costs. Regulators also tend to scrutinize these firms more closely, adding to the complexity of investing in this space.

Opportunities in the Downward Correction

Despite the current downturn, Abakkus Mutual Fund argues that the decline in small-cap stocks may represent a strategic buying opportunity. ‘This creates a potential accumulation window to acquire high-potential businesses at more sustainable valuations before the next growth cycle begins,’ said Vaibhav Chugh, CEO of Abakkus Mutual Fund.

Chugh emphasized that small-cap stocks offer exposure to emerging and sunrise industries such as defence, aerospace, pharma, biotech, electronics, electric vehicles, batteries, AI-led services, and medical devices. These sectors, he noted, are often dominated by small firms, especially in India, where tech giants like Google and Apple are absent, and the startup ecosystem is still developing.

Long-Term Returns and Investment Strategy

The study by Abakkus Mutual Fund highlights the long-term performance of small-cap stocks. From September 2016 to January 2026, the Nifty Small-cap 250 index delivered a compound annual growth rate (CAGR) of 17%, outperforming the Nifty 50 index, which returned 12% over the same period.

On a three-year and five-year basis, the Nifty Small-cap 250 index recorded CAGRs of 21% and 22%, respectively, compared to 13% for the Nifty 50. However, the study notes that the 10-year period analyzed begins on September 1, 2016, and the returns may vary if the start date is adjusted to January 1 or 2, 2016.

Chugh emphasized that the superior long-term returns of small-cap stocks reinforce the importance of staying invested through market cycles rather than attempting to time the market. ‘The better long-term return delivered by the small-caps reinforces the importance of staying invested through cycles rather than attempting to time the market,’ he explained.

However, experts caution that while small-cap stocks may deliver better returns over the long term, they are not guaranteed to outperform large-cap stocks in every market condition. The high volatility of small-cap stocks can lead to significant variations in performance, with the differences between highs and lows often greater than those seen in mid-cap and large-cap stocks.

For individual investors, the risks associated with small-cap stocks are considerable. ‘Amateur investors are generally saddled with such stocks,’ Chugh said, noting that while small-cap mutual funds may offer a more diversified approach, they can also underperform during market downturns.

The question of why investors might choose small-cap stocks despite their volatility is complex. While the average returns from small-cap stocks are higher, the performance of individual stocks can vary widely. ‘The average does not equate with specifics,’ Chugh explained. ‘The average may be positive, but the stocks an investor holds may tank.’

Given the high stress levels associated with small-cap investing, Chugh advised that investors should be prepared to withstand market fluctuations and avoid chasing losses. ‘If a small-cap tanks, one may pump more money, get good money to chase after the bad, and the stock may never recover,’ he warned.

While the current decline in small-cap stocks presents an opportunity for long-term investors, it also highlights the need for careful consideration and a well-diversified investment strategy. As the market continues to evolve, the performance of small-cap stocks will likely remain a key factor in shaping the future of India’s investment landscape.