"2.3x, 3.9x, 4.9x – India’s Incredible Market Multipliers"

Investors are shaky when it comes to investing in mid-cap and small-cap stocks. The prime reason is patience in investing in this segment. Quick returns often become the prime reason for distraction while reaping the long-term gains from the investment portfolio.  In the last 7 years Indian equity market and economy have gone through a sea of changes, where the journey began from the collapse of IL&FS, followed by DHFL & PMC bank, creating a ripple effect of shortage of liquidity for the MSME sector.  The bank's NPA ratio was hovering around 18% during that time, which further exerted pressure on the category of midcap and small-cap stocks. 

Then came the  Yes Bank crisis and the Covid crisis.  But in the span of just five years, India's investible equity universe has undergone a seismic transformation, ballooning from ₹132 lakh crore in June 2020 to ₹387 lakh crore by June 2025—a staggering 3x surge. This growth, fueled by post-COVID recovery, surging domestic retail participation, and structural economic reforms, has reshaped the market cap pyramid. Small caps have outpaced all others with 4.9x expansion, eclipsing the mid-cap bucket of 2020 in size.

 Last 10 years, many companies have moved from the bucket of small-cap to midcap and from midcap to large-cap.  Similarly lot of micro-cap companies became small-cap. Now, this transformation of the bucket is not based solely on valuations but on business transformation and growth. In simple terms, it is not a blind jump of buckets but a genuine one backed by strong fundamentals of business.

🟧 𝐋𝐚𝐫𝐠𝐞 𝐂𝐚𝐩 •₹𝟏𝟎𝟏 𝐥𝐚𝐤𝐡 𝐜𝐫 → ₹𝟐𝟔𝟏 𝐥𝐚𝐤𝐡 𝐜𝐫 (𝟐.𝟑𝐗)

•Top 𝟏𝟎𝟎 𝐜𝐨𝐬 now bigger than ever

•1st Large cap: ₹𝟏𝟕.𝟖 𝐥𝐚𝐤𝐡 𝐜𝐫 (vs ₹𝟖.𝟗 𝐥𝐚𝐤𝐡 𝐜𝐫 in 2020)

 ✅ Upside: Stability, liquidity ⚠️ Risk: Slower compounding ahead

 🟫 𝐌𝐢𝐝 𝐂𝐚𝐩 •₹𝟐𝟏 𝐥𝐚𝐤𝐡 𝐜𝐫 → ₹𝟖𝟐 𝐥𝐚𝐤𝐡 𝐜𝐫 (𝟑.𝟗𝐗)

•150th midcap today = ₹𝟑𝟎,𝟖𝟎𝟎 𝐜𝐫 (vs ₹𝟕,𝟎𝟎𝟎 𝐜𝐫 earlier)

 •Explosion of quality mid-sized leaders

✅ Upside: Growth & leadership shift ⚠️ Risk: Valuation overheating

🟤 𝐒𝐦𝐚𝐥𝐥 𝐂𝐚𝐩 •₹𝟗 𝐥𝐚𝐤𝐡 𝐜𝐫 → ₹𝟒𝟒 𝐥𝐚𝐤𝐡 𝐜𝐫 (𝟒.𝟗𝐗)

•Small cap bucket (2025) > Mid cap bucket (2020)

•250th small cap today = ₹𝟏𝟎,𝟑𝟎𝟎 𝐜𝐫 (vs just ₹𝟏,𝟕𝟎𝟎 𝐜𝐫 in 2020!)

The current phase of the Indian economy is one of the golden phases despite Trump's policy actions. As of October 2025, with the Sensex hovering around 80,983 points, analysts forecast modest 6–10% gains through year-end, emphasising quality over quantity in investments.

 Yet, this boom comes with caveats, elevated valuations, volatility in smaller segments, and global headwinds like U.S. tariffs and geopolitical tensions. This report dissects the data, drivers, and dilemmas, offering actionable insights for investors navigating this dynamic landscape.

 The point is that what we fail to understand is what drives the midcap and small-cap segment. FII’s, Indian Investors, coverage by the analyst or by institutional investors. Well, today the Indian midcap and small cap is researched more by Indian analysts and invested more by Indian Institutional and retail investors.

Being a financial advisor, one might be sceptical about asking clients to invest in midcap and small cap, but the point is, does your scepticism impact clients’ wealth when compared to peers investing in the same market?

Demat accounts skyrocketed from 5 crore (2020) to 19 crore (Jun 2025), with SIP inflows hitting record highs. Retailers funnelled billions into mid/small caps via mutual funds, amplifying breadth.

RBI's liquidity injections, PLI schemes (boosting exports/import substitution), and fiscal prudence (inflation tamed to ~4% by mid-2025) underpinned stability. GDP growth averaged 7–8% annually, outpacing peers.

By 2024, mid/small caps returned 28–31%, dwarfing large caps' 10–13%. But 2025 brought sobriety: Small caps entered a bear market (-18% from Sep 2024 highs), with P/E ratios at 35x (vs. 10-yr avg. 22x). Again, the barometer of the last 10 years is filled with loss of pains, where the last 5 years we have seen dramatic changes post the worst of the former 5-year time frame. This is a major drawback for financial advisors to understand the wrong barometer.

The current valuations of midcap and small-cap stocks are well justified for long-term wealth creation since the growth is married to Indian GDP growth. GST cut down, Nil income tax up to 12lakhs, falling interest rates, all spook the consumption demand market for India. When sales pick up, the demand also picks up, which leads to additional capacity utilisation.  Rural recovery and middle-class expansion (per capita income up 35% from 2014–23). Further, the per capita income also boosts a strong story for the midcap and small-cap segment

• Nominal GDP per Capita: $2,878 (USD, current prices) for calendar year 2025. In INR terms, this equates to approximately ₹2,39,000 at an average exchange rate of ~₹83/USD.
• GDP per Capita (PPP): $12,132 (international dollars), ranking India 125th globally and 35th in Asia—about 47% of the world average.
• Per Capita Net National Income (NNI): ₹205,324 (current prices) for FY 2024-25, up ~8.7% from ₹188,892 in FY 2023-24. At constant (2011-12) prices, it's ₹133,501, indicating real growth of ~3.5%.

These projections factor in 6.5–6.8% real GDP growth for FY 2024-25, stable inflation (~4.5%), and a population growth rate of ~0.8%. India's global rank in nominal per capita GDP is 142nd out of 193 economies, highlighting inequality despite aggregate size.

 When consumption demand (urban + rural, industrial + services) rises faster than supply, companies use up more of their installed capacity. Example:

 India’s Recent Data Points

·        During the 2014–2017 consumption boom, demand pushed CU levels above 80%, prompting new project announcements in cement, auto, and steel.

• 2020 (COVID): CU collapsed to ~60%. GDP fell, no new capex.
• 2021–2023: Recovery + pent-up demand lifted CU back to ~74–75%.
• 2024–2025: With strong consumption (real estate, autos, manufacturing push), CU in many core industries (cement, steel, chemicals, autos) touched 78–80%, crossing the new investment threshold.

Demand-Capex Feedback Loop

• Step 1: Rising demand → higher CU.
• Step 2: CU ≥ 80% → companies plan new capacity (since existing plants can’t meet future demand).
• Step 3: New capacity → fresh investments → boosts GDP, jobs, and disposable income.
• Step 4: Higher incomes → further demand growth.

This is the virtuous cycle India is entering now (2023–2030), very different from the “supply-glut era” of 2010–2015. It's time to look at midcap and small cap investments in a different way and reduce the portfolio's dependency more towards large cap. We know that one generation has suffered huge losses in terms of financial planning simply by making investments in bank FDs and Post Office savings schemes under the myth of capital security.  We are repeating the same with too many bets on large-cap stocks under the same myth of security.