Smaller stocks give higher returns to investors so far this fiscal

In a reflection of the bullish sentiment in the equity market, smaller stocks have captured the limelight, giving higher returns to investors so far this fiscal.

The BSE smallcap index has zoomed 6,270.61 points or 30.36 per cent to 26,919.94 while midcap index has jumped 3,672.12 points or 18.19 per cent to 23,853.43, according to an analysis of their performance in the first five months of the ongoing financial year.

In comparison, the 30-share BSE benchmark has gained 8,043.24 points or 16.24 per cent to 57,552.39.

Analysts said that despite a sharp underperformance in the month of August, the midcap and smallcap indices have outperformed the broader benchmark index so far this fiscal.

"Higher returns by midcaps and smallcaps were bolstered by healthy earnings, improved sentiments, benign liquidity, and low cost of capital. Indian equity markets have showed strong resilience despite the country being swept by COVID 2.0 in April-May'21 which had soured sentiments and impacted economic activity. Since restrictions this time around was localised and less stringent versus the lockdown in CY20, the impact in 1QFY22 was largely contained.

"In fact, the market has been strong and largely looked through the second wave on the back of strong liquidity and robust participation from non-institutional investors," Sneha Poddar, AVP Research, Broking & Distribution at Motilal Oswal Financial Services, said.

Further, Poddar said that macro trends -- exports, daily e-way bill generation, gross taxes, imports and auto sales -- indicate improvement in economic recovery after lockdowns were eased.

The BSE midcap index reached its all-time high of 23,872.83 points on Tuesday while the smallcap index scaled its lifetime peak of 27,323.18 on August 4.

The BSE 30-share bluechip index jumped to its record high of 57,625.26 on Tuesday.

"Reducing number of COVID cases in India followed by pick-up in vaccination progress, gradual unlocking in various states raised hopes of economic recovery from the 2nd wave of the pandemic. Also good corporate earnings in 1QFY22 post strong FY21, have provided support to the market," Poddar added.

The BSE benchmark index has soared over 9 per cent this month to scale the 57,000-mark for the first time on Tuesday. In comparison, the midcap index rose 3.31 per cent in August while the smallcap index gained just 0.49 per cent.

"Typically, during an economic upcycle the broader market outperforms. India is on the cusp of an economic upcycle.

"The market expects the coming 2 to 3 years to report good growth. Small and midcap companies will benefit from this economic expansion. But the more important factor is the irrational exuberance of the exploding number of retail investors chasing the smallcap stocks," V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said.

Last fiscal, the BSE smallcap index zoomed 11,040.41 points or 114.89 per cent while the midcap jumped 9,611.38 points or 90.93 per cent. In comparison, the BSE benchmark clocked 20,040.66 points or 68 per cent gain last financial year.

According to the analysts, smaller stocks are generally bought by local investors while overseas investors focus on bluechips or large firms.

The midcap index tracks companies with a market value that is, on an average, one-fifth of bluechips or large firms. Smallcap firms are almost a tenth of the large firms.