Nifty Smallcap 250 hits 52-week high. Should smallcap mutual fund investors continue SIPs or book profits?

The Nifty Smallcap 250 has climbed to a fresh 52-week high putting small-cap stocks back in focus among equity mutual fund investors. The recent rally has also raised an important question for investors: should they continue investing through SIPs, increase their exposure to small-cap funds or become more cautious with fresh allocations after the sharp run-up?

While a new high can often make investors wary of profit booking, experts believe the index level alone should not determine investment decisions. Investors should instead look at their investment horizon, risk appetite, asset allocation and whether their small-cap exposure has moved significantly above the level originally planned.

Sorbh Gupta, Head – Equity, Bajaj Asset Management Limited told ETMutualFunds that investors with a minimum five-year investment horizon, continuing SIPs in small-cap funds remains an appropriate approach. While the earnings outlook remains encouraging, elevated valuations in certain segments and ongoing global uncertainties support a disciplined and staggered investment approach rather than significantly increasing exposure, Gupta said.


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For investors who have already made strong gains, Gupta said any rebalancing decision should depend on the investor’s intended asset allocation and risk profile. If small-cap funds now account for a larger share of the portfolio than originally planned, investors can consider shifting part of the allocation towards large-cap or flexi-cap funds to restore the desired portfolio mix

Manish Kothari, CEO & Co-Founder, ZFunds shared with ETMutualFunds that the fresh high in the Nifty Smallcap 250 looks more dramatic than it actually is, noting that the index is closer to its September 2024 peak than the Nifty 50 is to its own peak. He said the last six months of strength have been earnings-led, supported by themes such as data centres, auto ancillaries, energy transition, renewables, defence, aerospace and semiconductors. According to Kothari, this has contributed to small caps outperforming large caps by roughly 20% so far this calendar year.

For existing investors, Kothari said a sharp run-up alone is not sufficient reason to reduce exposure. Instead, investors should check whether small-cap weightage has moved meaningfully above their strategic asset allocation. If it has not, staying invested may be reasonable. If the allocation has become significantly overweight, investors can rebalance. For example, if the planned small-cap allocation was 15% but it has risen to 25%, the investor could consider bringing it back to 15%.

Kothari said profit booking should follow the asset allocation plan rather than the market headline. For fresh investments, he said a combination of lump sum investments and STPs could work, depending on an investor’s risk tolerance.

Small-cap vs mid-cap vs large-cap

The Nifty Smallcap 250 index rose to nearly 18,367, the highest level in nearly two years. The index is now close to its all-time high level of 18,688 which it had hit in September 2024. Nifty Smallcap 100 index also hit a fresh record high near 19,820.

Nifty Smallcap 250 Index hit its 52-week high level at 18,407, Nifty Midcap 150 Index hit its 52-week high at 23,479 and was trading at high of 23,402. Nifty50’s 52-week high level was 26,373 and is now trading at 24,630.

The rally in small-cap stocks also comes at a time when investors are comparing the relative attractiveness of large-, mid- and small-cap funds. While smaller companies can offer higher growth potential, they can also see sharper declines during periods of market stress. Therefore, investors need to assess the potential return against the level of volatility they can tolerate.

Manish Kothari said large caps provide stability and valuation comfort and can act as an anchor for a portfolio, while mid- and small-cap stocks provide the growth engine and greater scope for alpha. In his view, the most important factor for wealth creation is the investment horizon, while valuations are less important than an investor’s ability to stay invested through market volatility.

Kothari said investors should ask themselves whether they can withstand a 25-30% drawdown without panic-selling. If they can, small caps can have a place in their portfolio. However, investors who become anxious when they see their portfolios in the red may not be suited to small-cap exposure at this stage, irrespective of valuations.

Gupta said large-cap funds currently offer relatively greater valuation comfort, while mid-cap and small-cap funds continue to offer higher long-term growth potential along with higher volatility. He said the right allocation should depend on an investor’s investment horizon, risk profile and overall asset allocation rather than market-cap preferences alone.

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Market valuations

According to a report by Axis Mutual Fund, over the last several years, many large-cap sectors have seen little or no valuation expansion, Mid caps trade nearly 57% above their 2019 valuations, while small caps are up more than 70%.

The report further said that future returns may depend increasingly on earnings delivery rather than valuation expansion, in case of growth themes. Large caps, meanwhile, may offer a more balanced risk reward in case of a macro recovery.

The report by Axis MF also highlighted that large caps outperformed after the global financial crisis, SMIDs dominated the 2014-17 cycle, underperformed during 2018-20, and then staged another period of strong outperformance that peaked in 2023.

Historically, phases of sustained outperformance by any market cap segment have eventually moderated as valuations and earnings expectations adjusted. Importantly, the starting point matters for better risk adjusted returns. When valuations fully reflect growth expectations, future returns tend to rely more on earnings delivery.

Small-cap allocation: How much is enough for investors now?

Small-cap funds can provide exposure to relatively faster-growing companies and emerging themes, but their higher volatility means they should generally not be the sole component of an equity mutual fund portfolio. The key question for investors is how much small-cap exposure is appropriate within their overall portfolio and whether they can stay invested through market cycles.

Sorbh Gupta said small-cap funds can play a complementary role in a diversified equity portfolio by providing exposure to companies with relatively higher long-term growth potential. However, they should form part of a balanced portfolio alongside large-cap and flexi-cap funds, with the allocation based on the investor’s risk profile and investment horizon.

Given elevated valuations in certain market segments and ongoing global uncertainties, Gupta said new investors can consider building small-cap exposure gradually through SIPs, provided they have a minimum five-year investment horizon, rather than taking a large exposure at one point in time.

Kothari said small caps continue to stand out as potential alpha generators. While large caps have greater exposure to established areas of the economy such as oil and gas, banks and industrials, small caps can provide exposure to emerging areas such as biotech, electric vehicles, semiconductors, the digital economy and businesses integrating AI.

For new investors, Kothari said small caps can play a meaningful role as a growth driver rather than being avoided simply because the index is at a fresh high. He said small caps should generally account for around 10-20% of total equity allocation for most investors, with higher exposure suitable only for investors with long investment horizons and strong risk appetite.

However, he suggested that new investors should enter small caps through SIPs rather than lump sum investments and should not make small caps their first equity fund. Investors building their first mutual fund portfolio should start with a large-cap or flexi-cap fund, he said.

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Smallcap funds at 52-week high

Out of 36 small cap funds now available, the NAV of nearly 33 funds were at their 52-week high level between August 5-7, 2026. The remaining three funds were HDFC Small Cap Fund and Tata Small Cap Fund had their respective 52-week high NAVs on September 19, 2025 and lastly Quant Small Cap Fund had its 52-week high NAV on July 6, 2026.

In the last one year, small cap funds delivered an average return of 13.67% and TrustMF Small Cap Fund delivered the highest return of 30.56% in the same period whereas Tata Small Cap Fund lost the most of around 1.05%.

What will determine whether small caps sustain the rally?

With the Nifty Smallcap 250 and small cap funds at a 52-week high, according to the experts the sustainability of the rally will depend on whether corporate earnings and economic fundamentals continue to support current valuations. Investors will also need to watch external factors that can affect liquidity, risk appetite and market sentiment.

Kothari said the fact that small caps are at a 52-week high is not, by itself, a red flag. He noted that the Smallcap 250 remains closer to its September 2024 high rather than being significantly above it. According to him, the key question for sustaining the rally is whether earnings delivery continues to match the momentum that has already been priced into small-cap stocks.

Gupta said the outlook for small caps will depend on the continuation of healthy corporate earnings, resilient domestic economic fundamentals and sustained earnings growth across the broader market. At the same time, investors should monitor elevated valuations in certain segments, global geopolitical developments, crude oil prices, interest-rate expectations and foreign capital flows.

Gupta further said short-term volatility or consolidation can follow the recent rally, but investors should focus on long-term fundamentals rather than short-term market movements. He reiterated that a disciplined SIP approach with a minimum five-year investment horizon remains appropriate for small-cap exposure.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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