Analyzing NIFTY Smallcap Indices: A Deep Dive into Historical Returns

_{Published on: 16 Feb, 2025 14:35}

In the below subsection, we will do a detailed performance analysis of NIFTY Small Cap Indexes which will include their return and risk analysis since 2005. This analysis will also help mutual fund investors in the risk-return profile of small-cap mutual funds as there is a dearth of data related to small-cap mutual funds which goes back up to 2005.   

The NIFTY Smallcap indices—comprising the NIFTY Smallcap 50, NIFTY Smallcap 100, and NIFTY Smallcap 250—are essential tools for tracking the performance of small-cap companies in the Indian stock market. These indices focus on smaller companies, which are known for their high growth potential but also come with higher volatility and risk compared to larger, more established companies.

1. NIFTY Smallcap 50: This index tracks the 50 smallest companies by market capitalization in the small-cap category. It provides insights into the performance of smaller, high-potential companies, though these companies tend to be riskier due to their size and market sensitivity.

2. NIFTY Smallcap 100: This index expands the coverage to the 100 smallest companies, offering a broader view of the small-cap market. It helps investors gauge the performance of a larger group of small companies, balancing risk and opportunity.

3. NIFTY Smallcap 250: The most comprehensive of the three, this index tracks the 250 smallest companies by market capitalization. It provides the widest perspective on the small-cap market, reflecting the performance of a diverse range of small companies.

1. Growth Opportunities: Small-cap companies are often in the early stages of growth, making them attractive for investors seeking high returns. The NIFTY Smallcap indices help identify these high-growth opportunities, especially during bullish market phases.

2. Diversification: Investing in small-cap indices allows investors to diversify their portfolios beyond large-cap and mid-cap stocks. This can be particularly beneficial when small-cap companies outperform during certain market cycles.

3. Market Sentiment: The performance of small-cap indices is often seen as an indicator of broader market sentiment. When these indices perform well, it typically signals that investors are willing to take on higher risk for potentially higher rewards.

4. Volatility and Risk: Small-cap stocks are known for their higher volatility, and the NIFTY Smallcap indices reflect this characteristic. They are useful for understanding the risk-return dynamics of the small-cap segment.

While small-cap indices offer exciting growth opportunities, they also come with significant risks that investors should be aware of:

1. Higher Volatility: Small-cap stocks tend to experience larger price swings compared to large-cap stocks. This volatility can lead to significant gains but also substantial losses, especially during market downturns.

2. Liquidity Risk: Small-cap stocks often have lower trading volumes, making it harder to buy or sell shares without affecting the stock price. This can be a challenge for investors looking to enter or exit positions quickly.

3. Business Risk: Small companies are more vulnerable to economic downturns, competition, and operational challenges. They may lack the financial stability and resources of larger companies, making them riskier investments.

4. Market Sensitivity: Small-cap stocks are more sensitive to changes in market sentiment and macroeconomic factors. Negative news or economic uncertainty can disproportionately impact small-cap companies.

5. Limited Track Record: Many small-cap companies are relatively new or have limited operating histories, making it harder to assess their long-term potential and stability.

In the below subsection, we will do a detailed performance analysis of each index which will include their return and risk analysis since 2005. This analysis will also help mutual fund investors in the risk-return profile of small-cap mutual funds as there is a dearth of data related to small-cap mutual funds which goes back up to 2005.   

 

The below shows NIFTY Small Cap 50 Index returns since 2006. The index has a volatile history when we look at its yearly returns trend. in-long term 

 

• 1-Year Return Analysis
  • One-Year mean return of NIFTY Small Cap 50 Index is 18.14%
  • Maximum and minimum returns are 136.47% and -66.85% respectively, which show a wide variance in return profile and the inherited risk of investing in small-cap shares and mutual funds. 
  • NIFTY Small Cap 50 Index had the highest one-year return between February 2009 and January 2010 whereas the lowest was during the 2008 financial crisis.
  • 
• 5-Years Return Analysis
  • Five year mean return is 7.87% and median return is 7.84%. The standard deviation of five years return is 8.54% which is much less compared to the standard deviation of the 1-year return of 46.27 which is four times of 5-year returns standard deviation. 
  • The maximum 5-year return was between February 2020 and January 2025 of 21.66%, which would have turned an investment of 1 lakh rupees into 2.665 lakhs.
  • 
• 10-Years Returns Analysis
  • Average 10-year investment period return for Nifty small cap 50 index is 7.95% and medium return is 6.94, standard deviation is 4.01%, possibility of loss is zero if someone invest for 10 or more years.
  • The maximum return in 10 year period is 15.43% which is very less if we look at the amount of deviation in yearly returns.
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Looking at the returns one can say the returns in Nifty small cap 50 is not very impressive given the amount of risk reflected by annual standard deviation.

In next subsection we will look at the Nifty Small Cap 250 Index, this index is used for benchmarking Small Cap mutual fund. As getting data for small cap mutual fund going back to 2006 is difficult, the analysis of benchmark will help us understand the long term risk return profile investing in small cap mutual fund.

 

• 1-Year Return Analysis
  •  The mean one-year return of 20.76 significantly overshadows the median of 16.23, with the mean being more than 4.5% higher. This glaring discrepancy highlights the presence of outliers skewing the data in a positive direction, making the mean an unreliable metric for accurate analysis. Yet, despite this, influencers and analysts continue to rely on mean returns in their presentations, potentially misleading audiences by masking the true nature of the data. Always question the metrics—because what’s presented isn’t always the full story.
  • Maximum (132.94) and minimum (-63.43) returns are also showing large divergence reflections of high risk.
  • 
• 5-Year Return Analysis
  • Average returns drop to 12.13%, while median returns fall to 10.97%, revealing significantly lower performance compared to the one-year holding period. This decline underscores the volatility and unpredictability of returns over time, with the average still being pulled higher than the median—a clear sign of positive skewness and the influence of outliers. It’s a stark reminder that short-term gains can distort expectations, and relying solely on averages can paint an overly optimistic picture.
  • The maximum is 24.97% and the minimum is -3.06%.
  • 
• 10-Year Return Analysis
  • Over the 10-year period, there are no negative returns (0 negative return years out of 10). This indicates a high level of consistency and resilience in long-term performance, despite short-term volatility.
  • The 10Y CAGR has a relatively low standard deviation of 4.34, with returns ranging from a minimum of 7.26% to a maximum of 20.47%. This suggests that the 10-year returns are less volatile and more predictable compared to shorter holding periods.
  • The median 10Y CAGR (11.71%) is very close to the mean (12.34%), indicating a symmetrical distribution of returns. This implies that outliers have minimal impact, making the mean a reliable measure for long-term performance analysis.
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Conclusion

The analysis of the Nifty Small Cap 250 Index returns across different holding periods highlights both the potential rewards and inherent risks associated with small-cap investments. The 1-year returns exhibit extreme volatility, with a wide range from -63.43% to 132.94%, and a mean significantly higher than the median, indicating the influence of outliers and high short-term risk. This is typical of small-cap indices, which are more susceptible to market swings and economic fluctuations. The 5-year returns, though less volatile, still show positive skewness, reflecting the unpredictability of small-cap performance even over medium-term horizons. However, the 10-year returns tell a different story, with no negative returns, a narrow range (7.26% to 20.47%), and a symmetrical distribution, demonstrating the resilience and compounding potential of small-cap investments over the long term.

While small caps can deliver higher growth, they come with elevated risk, including liquidity concerns and higher sensitivity to market downturns. Investors must weigh these risks against the potential for outsized returns and consider a long-term horizon to mitigate volatility. Diversification and patience are key when navigating the small-cap space.