Smallcap stocks may be approaching a favourable entry point after the recent market correction, according to a study by Bajaj Finserv Asset Management. The study suggests that improving fundamentals, healthier balance sheets, earnings recovery prospects, and corrected valuations are creating selective opportunities in the smallcap segment.
The study highlights a disciplined approach to investing in smallcaps, focused on identifying fundamentally strong businesses with long-term potential and for investors this means prioritising companies with solid financials, consistent earnings, and sustainable competitive advantages, while also capturing growth opportunities driven by strong business models and future expansion.
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The AMC highlighted that the smallcap universe has undergone a structural transformation over the last few years. Companies are increasingly relying on internal cash flows rather than debt to fund expansion, leading to stronger financial positions and better profitability metrics.
Aggregate capital expenditure in the segment rose from around Rs 2.2 trillion during FY19–FY22 to nearly Rs 3.4 trillion during FY23–FY26, while net debt-to-equity levels declined sharply from 0.52x in FY19 to almost zero levels in FY26. Return on equity (ROE) also improved from 9% to 12% during the same period.
According to the study, domestic institutional investors have gradually increased exposure to smallcap stocks through SIP-driven flows, which are generally more stable and long term in nature. At the same time, retail ownership in the segment has moderated slightly, which may help reduce speculative activity and excessive volatility.
The AMC further noted that the recent correction in broader markets has created valuation comfort in several smallcap stocks. Nearly 50% of smallcap companies are now trading below their 10-year average valuations, one of the highest such readings in recent years. The report said the broad-based correction has helped remove pockets of overvaluation and opened selective opportunities in fundamentally strong businesses.
The study also highlighted that smallcaps have historically outperformed during recovery phases following market downturns. During the post-COVID rebound between March 2020 and January 2022, the Nifty Small-cap Index surged 247%, compared to 138% for the Nifty 50 Index, reflecting the segment’s potential for sharper recoveries over long-term cycles.
Against this backdrop, Bajaj Finserv Small Cap Fund has delivered strong recent performance, according to the AMC. The fund, launched in July 2025, follows a “quality, growth, and value” investment strategy aimed at identifying scalable businesses with strong fundamentals and earnings visibility. Around 85.89% of the portfolio is allocated to small-cap equities.
The AMC said the fund generated 18.61% returns over the last one-month period, outperforming its benchmark return of 17.98%. Over three months and six months, the fund delivered 9.35% and 1.36% returns respectively, compared to the benchmark’s 6.51% and -3.50%. Since inception, the fund has generated nearly 7.20% alpha over the benchmark.
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The study emphasised that investors should continue following a disciplined approach while investing in smallcaps by focusing on fundamentally strong companies with sustainable business models, healthy financials, and long-term growth potential.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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