In this blog, we’re diving into some charts that might just flip your understanding of small cap versus large cap dynamics.
Over the past 19 years, from 2005 to now, both the Nifty index (represented by the blue line) and the small cap index (shown in orange) have delivered surprisingly similar outcomes. Despite expectations, they’ve pretty much matched each other’s returns over this extended period.
However, the plot twist comes post-COVID. Since the pandemic hit, small caps have taken the lead by a significant margin. From the COVID bottom, small caps have soared, marking a stark contrast to the somewhat lagging performance of large caps. Even after the initial recovery phase, small caps have outpaced large caps by a considerable margin, demonstrating their resilience and growth potential in the current market landscape.
Taking a closer look at the large cap to small cap ratio, we observe distinct phases over the last 19 years. There have been instances where large caps have outperformed small caps by a wide margin.
These phases, notably coming out of the 2008 bottom, from 2011 to 2013, and from 2018 to 2020, have seen large caps taking the lead. Currently, the ratio stands at a pivotal point, indicating the potential for a shift in favor of large caps once again.
While we can’t predict the future, historical data suggests that large caps may be poised for another run-up relative to small caps. This doesn’t necessarily mean that small caps will perform poorly, but rather, the pace of their growth might not match that of large caps. There’s also the possibility that small caps could experience a more significant downturn compared to large caps.
So, what’s the best approach for investors amidst this uncertainty? Diversification remains key. Allocating across the spectrum allows you to hedge your bets and mitigate risks associated with market fluctuations. If you’re inclined, you might consider slightly tilting your allocations towards large caps based on the current trend. However, maintaining a balanced portfolio across both small and large caps could also be a prudent strategy, ensuring you’re well-positioned to navigate whatever the market throws your way.
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