50% of small-cap stocks declined to the micro-cap category, only 4 became midcap in 7 years: Study

Nearly 50% of small-cap companies from 2017 declined into the micro-cap category by 2024, according to a study by Bajaj Finserv AMC. This has happened even as small-cap stocks have seen huge investor interest and inflows in the last few years.

Moreover, the small caps have also registered a CAGR of 27.6% between 2017 and 2014.

"The study reflects on the importance of selecting quality small-cap stocks to avoid potential pitfalls, revealing that nearly 50% of small-cap companies from 2017 have declined into the micro-cap category," the AMC said in a report on Wednesday (June 18, 2025).

The study further notes that small-cap stocks have also been at the forefront of IPO activity, witnessing 196 listings since 2020. But only four small-cap companies progressed to the midcap status, and none became a large-cap stock.

"However, only four have transitioned to the mid-cap status, and none to large-caps, emphasising the need for careful selection," the study said.

The report also noted that the Nifty Small Cap 250 Quality 50 TRI outperformed the Nifty Small Cap 250 TRI in 14 of the last 19 financial years. "Overall, the quality index delivered higher returns than all other indices in nine financial years from FY10," it said.

Surge in small-cap investing

According to the study, the small-cap segment delivered remarkable growth over the past seven calendar years, with market capitalisation surging fivefold from ₹17 lakh crore in 2017 to ₹92 lakh crore by the end of 2024, reflecting a compound annual growth rate (CAGR) of 27.6%1

In comparison, large-cap and mid-cap segments recorded CAGR of 14.5% and 21.6%, respectively, during the same period.

The contribution of small-caps to the overall market capitalisation also increased 1.4 times over the last three years. However, their contribution to corporate profits surged only 2.5 times in the past four years.

The study said that the second half of FY25 witnessed a correction in small caps, creating an opportunity to accumulate quality small caps at better valuation.

"As of April 2025, most small caps continue to trade below their 52-week highs, making the segment appealing from a valuation standpoint," it said.

While the small-cap index gained only 4% since FY24, profit after tax (PAT) grew by 38%. "Despite the price correction, small-cap profits rose to ₹29,941 crore in FY25 from ₹21,669 crore in FY246. Moreover, 74% of the top 250 small-cap companies reported a double digit returns on capital employed (ROCE)," it said.