Why small-cap index fell almost 3% in November despite Nifty 50 hitting record highs - EXPLAINED

Small-cap index: The Indian stock market ended November on a mixed note, marked by a sharp divergence between large-cap strength and small-cap weakness. Even as the Nifty 50 scaled fresh all-time highs, small-cap stocks faced broad-based selling pressure, reflecting stretched valuations, fragile liquidity, and muted earnings momentum. Through the month, the Nifty Midcap 100 gained 2%, and the Nifty 50 rose 1.8%, extending the ongoing large-cap driven rally. In stark contrast, the Nifty Smallcap 100 fell almost 3%, making it the clear underperformer among headline indices. The institutional flow pattern reinforced this trend. FIIs sold ₹17,500.31 crore worth of equities in November — marking their fifth consecutive month of selling — while DIIs continued their 28-month buying streak, pumping in over ₹77,000 crore. With FIIs favouring safer, liquid names and DIIs turning selective, smaller companies bore the brunt of selling. How Smallcaps Performed Out of the Nifty Smallcap 100 constituents, 34 stocks gained, while 66 declined during the month. Jyoti CNC Auto was the standout performer, rising 15%, while Whirlpool India emerged as the top loser, slipping 28%. Other heavy drags included BEML, KEC International, Olectra Greentech, and Kaynes Technology, each falling more than 15%. Why Smallcaps Fell in November Valuations Stretched: The Nifty Smallcap 100 had been trading at unsustainably high valuations even before the current correction. Despite a year of consolidation, valuations remain elevated, keeping investors cautious. Analysts believe only a meaningful pickup in earnings can bring the index back to fair levels and revive broader participation. Earnings Recovery Still Weak: While Q2 FY26 delivered robust earnings for large companies, small-cap numbers were underwhelming. Around 90 companies in the Nifty Smallcap 100 reported a mere 1.5% growth in consolidated net profit, sharply lower than the 7%–8% growth recorded by the Nifty Midcap 100 and Nifty 50. This muted profitability has kept valuations high and deterred fresh institutional flows. FII Participation Remains Soft: FIIs continued to exit India’s broader markets through the September and November quarters, hitting smallcaps hardest due to their lower liquidity. Mutual fund activity has also favoured midcaps over smallcaps. Over the past year, MFs added notable positions in 25 midcaps, compared with only 18 smallcaps, reflecting cautious sentiment. Profit Booking: Following the euphoric rally leading up to late 2024, smallcaps have spent almost 12 months in time correction. With largecaps reclaiming leadership and delivering steady returns, investors shifted capital away from riskier pockets. Time corrections often follow valuation spikes, and 2025 was no exception. Outlook: Is the Worst Behind Smallcaps? Market experts believe the correction has created a healthier setup for long-term investors. Viraj Gandhi, CEO of SAMCO Mutual Fund, noted that “excess froth has cooled, valuations have normalised, and the segment is healthier today than during last year’s euphoric phase.” He added that this phase creates a favourable entry window for patient investors looking to build a high-conviction small-cap portfolio over a five-year horizon. While volatility may persist in the near term, improving macro stability, easing inflation, and strong domestic flows could help stabilise the segment. However, sustained recovery will depend on earnings strength, liquidity conditions, and rational valuations — factors that will determine whether smallcaps can reclaim leadership in 2026. Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.