Outsize Risks & Rewards in Small Cap Index Investing

The Outsize Risks & Rewards in Small Cap Index Investing.

Is it worth it ? Yes, but under one specific condition.

Before the Covid Crash in January 2020, Nifty 50 was at it’s then all time high of 12,430. In the subsequent 9 weeks, it fell by 40% to 7,511.

How did the Nifty Small Cap 250 Index perform pre and post covid crash ? And this is instructive.

At the time that Nifty 50 was at it’s peak of 12,430 pre-covid, the small cap 250 index was ALREADY down by 30% from it’s own peak that it had seen 2 years earlier in Jan 2018. In fact, it was down by 44% a few months before covid, in Aug 2019, and was attempting a recovery when Covid struck. After the crash, it was down by 62% from it’s 2018 peak.

After the crash, Nifty had bled 40% vs Small Caps 62%. Add this to a severe underperformance for 2 years earlier and it seems a no-brainer that the small cap index is a no-go area.

Not so fast.

From the March 2020 low to the Jan 2022 high, the small cap index increased by 3.67 times as compared to Nifty 50’s 2.51 times.

Even earlier, from late 2013 to early 2015, Nifty 50 rallied by 78%. At the same time, Small Caps 250 rallied by 150%.

An even more striking outperformance can be seen if the 2015 date is extended to 2018. From 2013 to 2018, Nifty more than doubled, a rough gain of 110-120%. At the same time, Small Caps 250 rallied by 300%, a significant out-performance.


The lesson for an investment / buy and hold perspective : The small cap index appears to be a good investment only if it falls by at least 40% from it’s prior peak. A decline of 15-30% in small caps index seems to be too small a decline to be confident of future gains.

Note : Past data is not indicative of future performance.