When small caps shine and when they stumble: Lessons from market cycles since 2020

According to an analysis by Edelweiss Mutual Fund, the Nifty Smallcap 250 Total Return Index (TRI) gained 15.95 percent between February and September 2026, compared with an 8.08 percent decline in the Nifty 50 TRI. This translates into an outperformance of over 24 percentage points. The analysis, based on data from AceMF as of September 30, 2026, compares the performance of the two indices across different market phases since February 2020.

When small caps delivered higher returns The strongest outperformance was recorded during the bull market between June 2023 and September 2024. During this period, the Nifty Smallcap 250 TRI surged 86.08 percent, more than double the Nifty 50 TRI's 41.96 percent gain. A similar pattern emerged during the post-Covid recovery between June 2020 and January 2021. Small caps gained 69.01 percent, compared with 39.68 percent for large caps.

Even during the subsequent economic growth phase, from February 2021 to May 2023, small caps returned 61.58 percent, substantially higher than the Nifty 50's 33.53 percent. Together, these periods show how smaller companies have historically benefited from improving market sentiment and stronger investor appetite for risk. But the losses were also steeper The same data reveals the other side of small-cap investing.

During the Covid-induced market crisis between February and May 2020, the Nifty Smallcap 250 TRI fell 29.79 percent, against a 17.51 percent decline in the Nifty 50 TRI. A similar divergence appeared during the correction between October 2024 and February 2025, when small caps lost 25.17 percent, compared with a 13.90 percent fall in large caps. However, small caps have not consistently outperformed during every recovery.

Between March 2025 and January 2026, the Nifty 50 TRI gained 15.67 percent, slightly ahead of the Smallcap 250 TRI's 14.43 percent return. What should investors take away? The historical comparison highlights an important distinction: higher small-cap returns have generally come with greater volatility and deeper drawdowns. For investors, this means that exposure to small-cap funds should depend on investment horizon and risk tolerance rather than recent outperformance alone.

While small caps can contribute to long-term portfolio growth, investors must also be prepared for periods of substantial underperformance. Diversifying across market capitalisations can help reduce dependence on any single segment of the market.