Smallcap profits surged 3x faster than largecaps? The risk investors can’t ignore

A report released by DSP Mutual Fund based on the earning trends for August 2026 shows that since FY17, small cap profits have grown at nearly 37% a year, more than double the pace of large caps. Sounds like an easy call, right? Except the real story behind those numbers is far more complicated than the headline number suggests, and it changes everything about how you should read this rally.

Here's something most investors never check. Strip out the single best and single worst performer from each market cap bucket, and small cap profit growth drops from 36.8% to 24.8%. Large caps barely move. That gap tells you a huge chunk of the small cap story is being carried by a handful of outlier companies, not broad-based strength across the space.
Image: DSP MFSmallcap.jpg

Small and mid cap companies weren't actually outselling large caps, their revenue growth was mid 11%, while large caps grew revenue at 13.5%. What actually happened is profitability recovered from a terrible starting point. Small cap margins went from just 1.3% to 8.4%. Mid caps went from 6.0% to 12.8%. Large caps, already healthy, moved only slightly. When you start from rock bottom, even a modest recovery looks explosive on a percentage chart.

Image: DSP MFMidcap.jpg
Source: DSP MF

Since FY22 instead of FY17, large caps actually outpaced smallcaps; 15.8% profit growth versus 13.7%. Smallcap margins have barely budged in this shorter window, sitting between 8% and 8.4%. Mid caps still look strong, but even there, a real portion of that growth is margin expansion rather than genuine business strength. The lesson? The timeframe you pick can completely change which story the data tells you.

Smallcaps went from profit to an outright loss in FY18, back to profit in FY19, fell 40% in FY20, then jumped 328% in FY21 and another 70% in FY22. Midcaps also swung into a loss during FY20 before bouncing back hard. This isn't steady compounding, it's violent swings between crisis and recovery, and extrapolating recent strong years in a straight line forward is exactly the kind of thinking that gets investors burned.

While small and mid caps were swinging between losses and blowout years, large caps stayed profitable through the entire stretch, with margins holding steady between roughly 8% and 13%. And in absolute terms, large caps still generate about ₹14.7 lakh crore in trailing profits, compared to ₹3.8 lakh crore for mid caps and just ₹1.6 lakh crore for small caps combined.

Image: DSP MF-largecap.jpg
Source: DSP MF

Across large, mid and small caps, large companies alone account for roughly 75% of total earnings, with far less volatility along the way. Small and mid caps can offer sharper growth phases, but that growth has come heavily from margin recovery and a few standout performers, not broad, repeatable strength. Before chasing the smaller cap growth story, it's worth understanding exactly what's driving those numbers.