The Nifty MIDCAP 150 Index Fund
Dipawali 2025 edition
Midcap Versus Smallcap.
Mid-cap indices have structurally dominated small-cap indices in long-term performance due to distinct economic and composition factors. Here are my views on the hot debate:
1. Performance Divergence.
Over the past 20 years, mid-cap indices have delivered nearly double the returns compared to small-cap indices (mid-caps up about 2,000% & small caps up 1,000%) showing a persistent performance gap favoring mid-caps.
The gap widened after 2015, with mid-caps entering their own distinct rally and pulling ahead, whereas earlier periods saw both segments perform comparably.
2. Index Construction & Migration.
The structural reason for mid-cap outperformance lies in index composition: top-performing small-cap stocks are routinely promoted to the mid-cap universe, leading the small-cap index to lose its strongest constituents over time.
Similarly, successful mid-cap stocks graduate to large-cap indices, but this churn hurts the small-cap segment more acutely, perpetuating its underperformance.
3. Recent Trends.
Since 2020, small-caps have held their ground, reducing the magnitude of mid-cap dominance, but not reversing the long-term trend.
Short-term outperformance by small-caps does occur, often during periods of exuberance or market recovery, but these are episodic rather than structurally persistent.
4. Economic and Risk Factors.
Mid-cap stocks strike a balance, offering higher growth potential than large caps, and greater stability than small caps. Their intermediate size makes them resilient to economic shocks, supporting smoother risk-adjusted returns.
Small-cap stocks, while presenting high growth potential, are highly volatile and routinely lose winners to mid-cap migration, creating a structural disadvantage over time.
5. Investment Implications.
Long-term investors seeking optimal risk-return profiles and stability should disproportionately favor mid-cap exposure over small-cap allocation.
Small-cap investing requires careful attention to migration effects and a willingness to accept higher volatility and less consistent outperformance.
My Inference.
In sum, the rivalry between mid-cap and small-cap indices remains structurally one-sided, grounded in the fundamental mechanics of index composition and migration, with mid-caps offering a superior economic profile for most investment horizons.
- Jishnu Chatterjee,
October 19, 2025.
PS. Stay away from "get rich quick" schemes. Avoid FOMO.
