The BSE mid-cap and small-cap stocks have outperformed the benchmark Sensex in 2023-24 with about 62 per cent returns, reflecting buoyant investors' sentiment amid robust macroeconomic conditions in the country and impressive quarterly earnings reported by various firms.

As per an analysis, the BSE mid-cap gauge jumped 15,013.95 points or 62.38 per cent in the 2023-24 fiscal, while the small-cap index climbed 16,068.99 points or 59.60 per cent. In comparison, the 30-share BSE Sensex raked in a gain of 14,659.83 points or 24.85 per cent during the fiscal under review.

"The recent surge in interest towards mid and small-cap stocks among retail investors can be attributed to their remarkable earnings growth and the pursuit of high-growth opportunities. Highlighting this trend, investors have shown a clear preference for mid and small-cap schemes over large-cap ones, as evidenced by the net inflows in equity mutual funds.

"This shift in investor sentiment is bolstered by the robust macroeconomic conditions in India, which traditionally foster accelerated growth in mid and small-cap stocks during periods of economic expansion. Moreover, the impressive quarterly earnings reported by numerous mid and small-cap companies further validate their substantial growth potential, enticing retail investors in search of profitable ventures," said Suman Bannerjee, CIO of hedge fund Hedonova.

The broader market put up an impressive performance in the 2023-24 fiscal. The BSE midcap gauge reached its record peak of 40,282.49 on February 8 after slipping to its 52-week low of 23,881.79 on March 31, 2023. The BSE small-cap index jumped to its all-time high of 46,821.39 on February 7 after hitting its 52-week low of 26,692.09 on March 31 last year. The 30-share BSE Sensex hit its all-time high of 74,245.17 on March 7 this year.

"The outperformance of midcap and small-cap stocks vis-a-vis the Sensex in the current fiscal year reflects the dynamic nature of the Indian equity market and the diverse opportunities it offers to investors," Sunil Nyati, Managing Director, Swastika Investmart Ltd, said.

The BSE small-cap index faced correction in March, falling 4.55 per cent. The midcap index declined marginally this month.

The correction observed in midcap and small-cap stocks during March is consistent with the assessment of heightened exuberance prevailing in the market, Bannerjee said.

"This correction reflects the impact of regulatory scrutiny on investment flows into micro, small, and midcap segments. The recent turbulence in the market, exacerbated by regulatory measures aimed at curbing speculation, underscores the necessity for a prudent and discerning approach to investing," he added.

The midcap index tracks companies with a market value that is, on average, one-fifth of blue chips, while small-cap firms are almost a tenth of that universe.

The meteoric rise of mid and small-cap stocks in the current fiscal hit a speed bump in March, Nyati said.

"After significantly outperforming their larger counterpart, these segments witnessed a correction amid concerns over stretched valuations and broader market jitters," he noted.

According to market analysts, small stocks are generally bought by local investors, while overseas investors focus on blue chips or large firms.

On the road ahead for the mid-cap and small-cap stocks in the coming fiscal, Nyati said, "FY25 promises an exciting yet challenging journey for mid and small-caps. The potential re-election of the current government in the upcoming general election could usher in stability, fostering a business-friendly environment. This, coupled with India's projected strong GDP growth, creates fertile ground for these domestically focused companies".

He further added that navigating this terrain requires caution.

"Rising interest rates, global headwinds, and potential profit-taking could lead to short-term volatility," Nyati said.

In the 2022-23 fiscal, the BSE Sensex climbed 423.01 points or 0.72 per cent.

However, the BSE small-cap gauge fell 1,258.64 points or 4.46 per cent and the midcap index dipped marginally by 42.38 points or 0.17 per cent in 2022-23.

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