In the first half of 2025 (H1), mid- and small-cap stocks significantly underperformed their large-cap counterparts, as risk-averse investors shifted their focus to stability amid global and domestic uncertainties. The Nifty Midcap 100 and Smallcap 100 indices posted modest gains, while the Nifty 50 delivered relatively stronger returns, led by heavyweight stocks in banking, IT, and FMCG sectors.
In the first half of 2025 (H1), mid- and small-cap stocks significantly underperformed their large-cap counterparts, as risk-averse investors shifted their focus to stability amid global and domestic uncertainties. The Nifty Midcap 100 and Smallcap 100 indices posted modest gains, while the Nifty 50 delivered relatively stronger returns, led by heavyweight stocks in banking, IT, and FMCG sectors.
A cocktail of high interest rates, concerns around global recession, and sustained foreign institutional outflows made investors increasingly wary of mid and small-cap segments. These segments, often viewed as riskier and more volatile, faced selling pressure as money moved toward safer, more liquid large-cap assets.
Foreign institutional investors (FIIs) preferred large-cap stocks backed by strong fundamentals, predictable earnings, and global exposure. Domestic institutional investors followed suit, further intensifying the gap between market segments. This risk-off approach mirrored global investor behavior as macroeconomic headwinds loomed large.
Retail participation in mid- and small-caps remained active, but returns were muted compared to previous years. Many retail portfolios took a hit as high-beta stocks failed to deliver expected gains. This has prompted renewed discussions on asset allocation strategies and the need to rebalance portfolios toward quality.
Analysts expect volatility to persist in the near term. However, if interest rates stabilize and economic indicators show improvement, mid- and small-cap stocks may regain momentum. The upcoming Union Budget and Q2 earnings will be key triggers. Until then, large-caps are expected to remain the preferred haven for cautious investors.
As the first half of the year wraps up, the divergence between large-cap dominance and mid/small-cap underperformance has become a defining theme of 2025. Investors and fund managers alike are now watching the second half closely for signs of a market-wide recovery or continued capital consolidation into blue-chip stocks.
Investors have been parking capital in large-cap giants, drawn by their resilient earnings, strong balance sheets, and global diversification. This "flight to quality" has widened the performance gap, with the Nifty 50 and Sensex registering steady gains, while midcap and smallcap indices remained volatile or even posted losses.
While the large-cap indices saw an average gain of 8–10% in H1, the Nifty Midcap 150 struggled to stay in the green, with several stocks falling double digits. The Smallcap 250 fared even worse, reflecting the risk-off sentiment across retail and institutional portfolios.
Market analysts suggest this underperformance could be temporary, but much depends on macro stability, earnings visibility, and liquidity flows. Some see a tactical opportunity emerging in select midcaps with strong fundamentals, especially in sectors like manufacturing, defence, and digital infrastructure.