Why Your Portfolios Not Performing Well Despite The Benchmark Indices Reaching Record Highs

India's benchmark indices, Nifty and Sensex, hit record highs in the week ended on November 28. However, the gains have not been reflected in the portfolios of retail investors, as the rally was triggered by some of the large-cap stocks, and broad indices still lack traction, experts said.

Large-cap stocks, with their higher market capitalisation and weightage, are propelling the indices forward, while most other companies, particularly small and mid-caps, are lagging behind.

Mid- and Small-Caps Underperformance

The equity market's performance speaks volumes. Out of the top 716 stocks listed for more than a year, only 252 have outperformed, while 464 have suffered losses. The median return, the middle value when all returns are arranged in order, is minus 10.54 per cent. The average return, i.e., the sum of all returns divided by the number of stocks, is minus 5.24 per cent. This means that most stocks have lost value, with 268 stocks dipping for more than 20 per cent and only 117 rising more than 20 per cent. This figure shows how uneven the market is.

Analysts explained that the gap exists because the Nifty index is led by a few heavyweight stocks. These are huge companies that have kept the index strong. In contrast, the Nifty Microcap 250 has fallen by about 10 per cent, while the Nifty Smallcap 250 has dipped by about 9 per cent from its all-time high. These are the categories that retail investors have much exposure to. Since these stocks have not been part of the rally, retail portfolios have been dragged down.

Reasons Behind the Underperformance

Experts attribute the poor performance of smallcaps and midcaps to subdued earnings, withdrawal of foreign institutional investors (FIIs), stretched valuation of small and midcaps and a high IPO (Initial Public Offering) pipeline.

V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, said that the indices' performance hides the fact that only a limited group of large-cap companies contribute to the rally, whereas retail investors, especially those who entered the market after Covid, are holding a large number of mid- and small-cap stocks with stretched valuations and poor earnings growth. Investing in small-cap stocks is risky, although they may provide high returns. The Nifty Small-Cap Index is still trailing about 9 per cent below its previous high, because small companies have not fully recovered and their profits are growing slowly.

As small caps turned out to be underperformers, FIIs cut their exposure and relied on large caps, which were considered safe havens on the back of the latest reforms, such as GST rationalisation, income tax reduction and RBI's (Reserve Bank of India) dovish monetary policy. Elevated IPO activities also contributed to the trend, with investors offloading small caps and starting to invest in the primary market.

What Do Investors Do?

This discrepancy between the key highs and the actual performance of most stocks is quite frustrating for retail investors. While the Sensex and Nifty are celebrating new highs, the broader market continues to struggle. Unless the rally spreads to more sectors and includes companies of different sizes, ordinary investors are unlikely to see meaningful improvement in their portfolios. For now, the indices only reflect the prosperity of a few large companies, while most retail investors continue to wait for their gains.

In this scenario, experts advise retail investors not to panic with underperforming small-cap portfolios; instead, adopt a more disciplined approach with a focus on fundamentals and a long-term view rather than exiting from the market randomly.

Vijayakumar expects small-cap stocks to continue to underperform in the short to medium term. He said retail-heavy portfolios will not recover meaningfully unless investors shift to large-cap stocks and pick up mid-cap stocks.