How to Handle the Drop in Small-Cap Stocks

Small-cap stocks recently experienced a significant drop, with the Nifty Smallcap 250 Index falling 20% from its peak in December. On January 27 alone, the index dropped 3.7%, followed by further losses the next day. Small-cap mutual funds also faced setbacks, with some losing up to 15% in a month. Contributing factors include ongoing foreign fund outflows, totaling over \$19 billion since September.

Despite this decline, many investors still find small-cap stocks appealing due to their high growth potential and undervalued opportunities. Varun Goel from Mirae Asset Investment Managers (India) highlighted that small caps can deliver higher returns and benefit from India’s structural growth story.

Historically, small-cap stocks have provided annualized returns of around 17% over a 5-10 year period. Goel emphasized that current valuations and market conditions present opportunities for long-term wealth creation.

However, investors need to manage the high volatility of small-cap investments actively. Including small-cap funds in a diversified portfolio is essential. Risk-averse investors should allocate a smaller percentage to small caps, while those with higher risk tolerance can allocate more for higher returns. Systematic Investment Plans (SIPs) remain a preferred strategy for navigating volatility.