42% smallcaps delivered negative absolute returns in Dec-March 2024

While the overall stock market went up, large companies significantly outperformed small companies between December 2023 and March 2024

The Nifty surged nearly 11 per cent from December 2023 to March 2024, but the median return of the top 250 small caps was just 3.8 per cent in the same period, according to an analysis by Motilal Oswal. In fact, 34% of the top 500 companies and 42% of small caps delivered negative absolute returns during this period. 

"This disconnect between the Nifty and broader markets could be attributed to factors such as attractive relative valuations of large caps post the small and mid cap rally, regulatory concerns over potential overheating, and resumption of FII flows which favor large caps," noted the brokerage.

Source: Motilal Oswal

Nifty up, small caps lag: The Nifty 50, an index of the top 50 Indian companies, performed well, increasing nearly 11% from December to March. However, small-cap stocks (companies outside the top 500) underperformed significantly, with the median return (the middle value) being only 3.8%.

Many companies gave negative returns: Even within the broader market, a significant portion of companies didn't do well. 34% of the top 500 companies and a much larger portion (42%) of small-cap companies actually delivered negative returns during this period.

After a period of strong gains for small and mid-cap stocks, large-cap valuations (the price relative to a company's earnings) became more attractive to investors. In simpler terms, large caps seemed like a better deal compared to small caps. There might have been concerns from regulators about the rapid growth of small and mid-cap stocks, potentially leading investors to be more cautious. Foreign Institutional Investors (FIIs) who invest in Indian stocks tend to favor larger, more established companies. An increase in FII investment during this period could have boosted large-cap performance.

Motilal recommends various investment options based on factors like how long you plan to hold the investment (holding period), what you want to achieve with your investment (theme), and how much risk you're comfortable with (strategy). It also includes some pre-managed investment options handled by professionals (managed strategies).

Here are some key takeaways on recommendations by Motilal Oswal based on the holding period:

Long Term (3+ years):

Equity Mid & Small Cap Strategies: For potentially higher growth but with more risk. DSP Small Cap Fund, HDFC Small Cap Fund, Invesco India Small cap Fund, PGIM India Small Cap Fund, Motilal Oswal Small cap Fund, HDFC Mid-Cap Opportunities Fund, Motilal Oswal Midcap Fund, PGIM India Midcap Opp Fund, WOC Mid Cap Fund Motilal oswal Small cap
 

Large Cap Multi-Cap: For diversification and potentially lower risk than pure small-cap strategies. Recommendations include Aditya Birla SL Focused Fund, Aditya Birla SL Frontline Equity Fund, HDFC Top 100 Fund, Mirae Asset Large Cap Fund, Motilal Oswal Large Cap
 

REITs: To invest in real estate and potentially benefit from rental income and property value appreciation.
 

InvITs: To invest in infrastructure projects and potentially benefit from returns on those projects.
 

Fixed Income - Roll Down Strategies: Invest in bonds that mature further out in the future, potentially offering steady income and benefiting from falling interest rates.
 

Medium Term (1-3 years):

Balance Advantage Funds: Aims for a balance between growth (stocks) and stability (debt) with potentially moderate risk. Recommendations include Aditya Birla SL Balanced Advantage Fund, ICICI Pru Balanced Advantage Fund, HDFC Balanced Advantage Fund, Kotak Balanced Advantage Fund
 

Multi Asset Allocation Fund: Similar to Balance Advantage Funds, invests in a mix of asset classes but might offer more flexibility in allocation. Motilal has recommended White Oak Multi Asset Allocation Fund as an option. 

Short Term (Less than 1 year):

Equity Saving Funds: Invest in a mix of stocks and debt, offering some growth potential with a focus on lower risk and liquidity. Motilal has recommended the following: ICICI Pru Equity Savings Fund, Kotak Equity Savings Fund

Liquid Funds/Ultra Short Term Funds: Provide easy access to your money with minimal risk and potential for low returns. Recommendations include HDFC Liquid Fund and ICICI Pru Liquid Fund