Beware! Blind investing in smallcaps won’t make you money as 148 of 250 stocks tumble in 2026

Investing in smallcap stocks alone has not been enough to make money in 2026. As many as 148 of the 250 stocks in the Nifty 250 have delivered negative returns this year, with losses stretching as much as 70%. Yet, the index has gained more than 7%, underscoring a growing disconnect between index-level gains and the returns investors would have earned from individual stocks.

The contrast with the past three years is striking. As many as 45 stocks in the index delivered multibagger returns over that period, with gains reaching up to 963%. But the rally has been far from broad-based in 2026. While a handful of stocks have continued to surge, more than half the index has slipped into the red, making stock selection increasingly important in a market where the headline index performance tells only part of the story.

The Iran war, persistent foreign institutional investor (FII) selling, elevated valuations and concerns over higher interest rates have weighed on the broader market. Over the past three years, GE Vernova and MCX have been among the standout performers, soaring 963%, followed by Welspun Corp, which gained 511%, and Netweb Tech, up 484%, among others.


The 2026 leaderboard looks very different. HFCL has emerged as the biggest gainer, rising more than 285%, followed by Welspun Corp, up over 230%. Raymond, Syrma SGS, Apar Industries and Aegis Logistics have also gained more than 100% this year.

What’s behind the sharp U-turn?

The broader market's shift has coincided with persistent foreign selling. Data shows that FIIs have sold more than Rs 3.5 lakh crore worth of Indian shares this year alone.

Pressure has also mounted in the debt market. India's benchmark 10-year government bond yield climbed to a three-year high earlier this week, as the Reserve Bank of India's latest liquidity-tightening measures added to the pressure.

Higher crude prices are a concern for India because they can widen the current account deficit, add to inflationary pressures and weaken the rupee.

Avoid smallcaps?

Elevated valuations have complicated the broader market's investment case, even as earnings growth remains strong. Midcap and smallcap stocks drove market performance in the first half of 2026, supported by retail and domestic institutional flows, resilient economic growth, and improving earnings expectations.

However, the sharp price appreciation has reduced the margin for error, particularly in stocks whose valuations already factor in sustained high growth.

Midcaps and smallcaps may still deliver strong earnings growth, but much of that optimism is already reflected in their prices. Bajaj Life Chief Investment Officer Srinivas Rao Ravuri sees a more compelling risk-reward opportunity in largecaps, with broader-market indices trading at premiums of as much as 50% to their long-term valuations.

After years of broader-market outperformance, Ravuri said largecaps now offer greater valuation comfort, earnings visibility and room for recovery.

"At this point, we have a clear preference for large-caps. The Nifty 50 is now trading close to its long-term average one-year forward P/E, while midcaps and small-caps are trading at roughly 25–50% premiums to their respective long-term averages. We do expect strong earnings growth from the broader market, but we think a lot of that is already reflected in valuations. So, for incremental money today, we find the risk-reward much more attractive in large-caps," Rao added.

Stock selection is key

At the ET Alpha Wealth Summit 2.0, Prashant Jain, Founder, 3P Investment Managers, stressed the importance of stock selection in the midcap and smallcap segments.

"Smallcaps, I always feel that in all market conditions it is a bottom-up market and you need to be a stock picker in that space. I think top-down does not work unless you are in a crisis. And when you are in a crisis, like say Lehman or 2020 COVID, then small and midcaps tend to fall a lot," he said.

Jain added that small and midcap stocks could fall 60%, 70% or 80% during such crises, when investors could adopt a more top-down approach to small and midcaps, or SMIDs. In most other market conditions, he said, stock picking is the right approach.

"Focus on good companies. A small company need not be weak. You buy a bearing company; it is small, but it can be very strong. And large companies need not be very strong. You buy the fifth car company; it is a large company, but it can be a mediocre company.

So, focus on strong businesses, focus on reasonable value, and I think we should do well. But I would not simply say that what has happened in the last three-five years should continue. In fact, if US 10-year yields move higher, this space, which is so narrative-driven, could be at grave risk," he added.

Still value on the table?

Despite the valuation concerns, earnings growth in the smallcap segment has remained strong. Smallcap companies covered by Motilal Oswal delivered 31% year-on-year earnings growth in the June quarter, comfortably ahead of the brokerage's 22% estimate. About 75% of its smallcap coverage universe met or exceeded expectations.

Earnings growth estimates for the coming year also favour smaller companies. FY27 profit growth is estimated at about 16% for the Nifty 100, 20% for midcaps and 34% for smallcaps, according to Venugopal Manghat, chief investment officer-equity at HSBC Mutual Fund.

"This provides room for mid and smallcaps to catch up with earnings," Manghat said. "However, given that smallcaps continue to trade at a premium, selectivity remains critical, with a focus on balance sheet strength, cash flow visibility and sustainable returns."

Manghat said the valuation gap alone does not justify a decisive shift towards largecaps, particularly as key largecap sectors such as information technology and consumer staples may continue to face weak earnings growth.

The outlook for midcaps and smallcaps will depend on how earnings growth, valuations and broader market conditions evolve. While earnings estimates suggest room for further growth, elevated valuations leave little room for disappointment. For investors, the focus remains on identifying businesses with sustainable earnings, strong balance sheets and reasonable valuations as market performance continues to vary across stocks and sectors.

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.