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By Alpha Research
Feb 27, 2026
A cheetah can touch 120 kilometers per hour. That is the number everyone remembers. It is the headline, the spectacle, the proof of dominance. What is forgotten is that it can sustain that speed for less than a minute. After thirty to sixty seconds, physiology intervenes—overheating, oxygen debt, muscle fatigue. The burst is real. The endurance is not.
Small caps behave the same way. In 2023 and 2024, Indian small caps sprinted. The Nifty Smallcap 100 delivered roughly 47% in 2023 and another 25% in 2024. Performance tables glittered. Retail participation surged. New demat accounts multiplied. For a moment, it seemed as if velocity itself had become a strategy.
Then 2025 arrived. The index declined about 9%, its weakest in three years, and nearly 69% of listed companies with a market capitalisation of over ₹100 crore posted negative returns. Many investors who entered near the peak saw 30–50% drawdowns.
The cheetah had slowed, and the illusion of permanent speed dissolved. What changed was not India’s structural growth story. It was liquidity.
Between 2019 and 2024, the aggregate market capitalisation of the small-cap segment expanded more than fivefold.
Yet the underlying businesses did not grow at a comparable rate. That divergence, price outpacing value, was the fault line beneath the rally. When foreign institutional investors turned net sellers to the tune of nearly $18 billion in 2025, and foreign ownership fell to multi-year lows, the segment most dependent on marginal liquidity felt the tremor first. Small caps were never deeply institutionally owned; they were the purest expression of domestic risk appetite. When that appetite cooled, repricing was swift.
There is a counterintuitive truth here. The size premium is cyclical. It thrives when credit expands, risk appetite rises, and valuation multiples are tolerated. It withers when liquidity tightens, and earnings delivery is scrutinised. India’s own history underscores the point.
Consider India’s size-effect cycles
Hence, the best time to allocate meaningfully to small caps is not when growth headlines are loudest, but when liquidity fear is most uncomfortable, provided earnings remain intact.
Paradoxically, the fundamental backdrop is stronger than sentiment suggests. December 2025 data indicate that small caps delivered a weighted average earnings growth of roughly 14.9%, materially ahead of large caps.
Several macro variables are turning constructive:
Unlike in 2008, balance sheets across many quality small caps are cleaner, governance standards have improved, and domestic investor participation is structurally deeper.
Yet valuation risk has not vanished. Even after correction, a meaningful portion of the universe trades at premiums to long-term averages. If earnings growth slips into single digits rather than the projected low-to-mid teens, further de-rating is plausible.
Liquidity in the segment remains thin during stress. February 2025’s sharp, concentrated declines offered a reminder. Global risks, from a U.S. slowdown to renewed emerging-market risk aversion, cannot be dismissed.
We are likely entering a K-shaped cycle.
My dear readers, portfolio construction must prioritise balance sheet strength, free cash flow generation, and demonstrable earnings visibility over revenue theatrics. In a post-liquidity regime, quality ceases to be a slogan and becomes a survival filter. Allocation itself must be calibrated to the mandate.
There is a natural temptation to wait for complete clarity. This instinct is rational, but markets rarely offer certainty at attractive prices. The opportunity, as always, lies in the ambiguous middle, when prices have corrected more than fundamentals, but conviction has not yet returned.
Small caps are still expensive in absolute terms but are not inherently reckless. This argument deserves intellectual respect.
Every large-cap compounder, from Infosys, Eicher Motors, to Page Industries, was once a small company. But let not survivorship bias distort memory. For every long-term compounder, dozens stagnate. The asymmetry of small-cap investing, the possibility that a few winners drive the bulk of returns, remains intact.
What has changed is the ease with which that asymmetry can be captured. The phase where any small-cap could be bought and expected to deliver 40% annual gains is over. What replaces it is a market that rewards research, patience, and the unglamorous discipline of balance-sheet analysis. Small caps are no longer a liquidity trade. They are an earnings execution story.
The cheetah still exists. But if you are building generational capital, you do not anchor your strategy to a thirty-second sprint. View small caps as cyclical accelerants, not permanent growth machines. You construct portfolios that can endure tightening liquidity, earnings volatility, and geopolitical noise without forced exits.
In wealth management, survival is the prerequisite for compounding. The next small-cap cycle will not be won by those who run fastest. It will be won by those who recognise when the sprint has ended and have the patience to build endurance instead.
Best Regards
Dr. Tarunika Jain Agrawal Ph.D.
Alpha Research
Disclaimer: The information on this document is provided for information purpose only and is available in the public domain. It does not constitute any offer, recommendation. The views expressed by the Alpha Capital Research are based on current market conditions and information available publicly
