Small-cap stocks raked in big gains in fiscal 2021-22 by giving up to 36.64 per cent returns, outshining the bigger benchmark gauge and experts believe that they may continue to outperform in FY23.
Markets faced many headwinds in the latter part of the last fiscal with the emergence of geopolitical tension, inflation concerns and FII selling.
Analysts said that the first half of the last fiscal was very good, while the market entered into consolidation in the second half, combined with high volatility.
The BSE small-cap index jumped 7,566.32 points or 36.64 per cent in the 2021-22 fiscal, and the mid-cap gauge went higher by 3,926.66 points or 19.45 per cent.
In comparison, Sensex closed the 2021-22 financial year with a gain of 9,059.36 points or 18.29 per cent.
"The market is climbing all walls of worry and showing strong resilience that is characteristic of a strong bull market.
"We are in a structural bull market, however, intermediate corrections will be a part of this journey.
"Mid-cap and small-cap stocks tend to outperform in a classical bull market, and I believe they may continue to outperform in FY23 as well, as the Indian economy is ready for multiyear growth despite short-term hiccups," said Parth Nyati, founder, Tradingo.
Nyati further added that historically, April remains one of the best months for the equity market, especially for mid-cap and small-caps, as the BSE small-cap index ended in green for 14 out of the last 15 years with an average gain of 7 per cent.
"Therefore, we can expect a great start to FY23 for the broader market," Nyati said.
The small-cap index reached an all-time high of 31,304.44 on January 18 this year, after hitting its 52-week low of 20,282.07 on April 19, 2021.
The mid-cap gauge reached a record high of 27,246.34 on October 19, last year.
It had hit its 52-week low of 19,423.05 on April 19, 2021.
The Sensex arrived at its all-time high of 62,245.43 on October 19, 2021.
Vinod Nair, head of research at Geojit Financial Services, said, "The correction of the broad market in the last 5-6 months have made mid and small-caps a good investment proposition for FY23.
"Small-caps are trading cheaper than the large and midcaps on a forward earnings growth basis.
"However, volatility cannot be avoided in the short-term, as uncertainties prevail about high inflation, a slowdown in economy and downgrade in future earnings."
According to Nair, small-caps have this standard to outperform the main indices during the glorious period and when supported by liquidity.
"This time along with solid recovery of domestic economy and strong inflows from retail and MFs made them outperform," he noted.
According to market analysts, small stocks are generally bought by local investors, while overseas investors focus on blue-chips or large firms.
Nyati said relentless selling by FIIs in the second half put large-cap stocks on the backfoot while domestic money continued to support the mid-cap and small-cap basket.
The main reason for the out-performance of mid-cap and small-cap stocks is the strong resilience of the Indian economy in the tough time, and continuous faith by domestic money in our economy is another factor that helped the broader market to stay ahead, he added.
"In our view, the opening up theme post-pandemic provides a big runway to growth for several small and midcap stocks as they tend to grow faster," S Ranganathan, head of research at LKP Securities, said.
In FY21, the BSE small-cap index had zoomed 11,040.41 points or 114.89 per cent, while the mid-cap index jumped 9,611.38 points or 90.93 per cent.
In comparison, the 30-share BSE benchmark had clocked 20,040.66 points or 68 per cent gain during the 2020-21 fiscal.