In the previous three posts on Index Investing we had seen the returns of the Nifty and the Midcap Indices. Hence, in this post I will cover how the Smallcap Indices (TRI) namely the Smallcap50, Smallcap100 & Smallcap250 have performed as well as compare their performance with the Nifty50.
If you want the key takeaways prior to reading the post then it is this: The Smallcap 250 is the best performing amongst all the other Smallcap indices. Also, just like what we saw in the Midcap Index, the larger the number of stocks in these indices, the better they perform. Thus the Smallcap 250 > Smallcap 100 > Smallcap 50. However, the Smallcap 250 underperforms the Nifty50 in around 50% of the periods for both the 5 year and 7 year timeframes. Furthermore, when compared to the Midcap Indices, the Smallcap indices have lesser periods of outperformance and also fell more during periods of underperformance.
METHODOLOGY
The same methodology used in the previous sections applies here. The data starts from April 2005 (instead of January 2003 for the Nifty TRI Indices). This is because the common earliest starting point for all the Midcap and Smallcap TRI Indices is April 2005 as per the NSE website.
RESULTS
GENERAL CHART
The above chart shows the performance of all the TRI indexes starting from 29th April 2005 until 30th August 2022. If someone invested Rs 100 in April 2005 in these indices and withdrew the money in August 2022 then:
- Rs 100 in Nifty 50 became Rs 1164.2 (CAGR 15.2%)
- Rs 100 in Smallcap250 became Rs 1162.7 (CAGR 15.2%)
- Rs 100 in Smallcap100 became Rs 817.8 (CAGR 12.9%)
- Rs 100 in Small50 became Rs 556.1 (CAGR 10.4%)
As you can see the return of the best-performing Smallcap Index was almost equal to the Nifty50. The other indices clearly underperformed the Nifty50. However, the above chart shows the return profile of only someone who invested in April 2005 and exited in August 2022. It does not give a CLEAR picture of returns for someone invested between these periods and/or for varying periods of time. It is for this reason we need to see the returns for rolling 5 year/7 year/10 year periods starting from April 2005
EXCESS RETURNS OVER NIFTY50
5 YEAR PERIODS
As the charts paint a clear picture I will not describe them too much. The Smallcap50 beat the Nifty only in 32% of the periods, followed by the Smallcap100 at 42% and thereafter by Smallcap250 at 54% of the periods. It is pertinent to point out here that these outperformances are much lesser than the Midcap Indices (Mid100 & 150 outperformed in 70% & 76% of the periods respectively)
If you compare the Midcap and Smallcap excess return charts they look very similar. The key period of outperformance was April-2014 until October-2018 and from April 2021 until now. During periods of outperformance (over Nifty50), the returns for the Smallcaps were similar to the Midcaps. However, during times of underperformance, the Smallcaps had lower returns as compared to the Midcaps.
7 YEAR PERIODS
The superior performance of Midcaps over the Smallcaps is much more evident in 7 year periods. The Smallcap50 beat the Nifty only in 27% of the periods, followed by the Smallcap100 at 41% and thereafter by Smallcap250 at 54% of the periods and thus there is no improvement as compared to the 5 year timeframe. In stark contrast, the Midcap100 & 150 outperformed in 70% & 84% of the periods. The quantum of outperformance over Nifty was also more in the Midcap indices.
10 YEAR PERIODS
It is the same story even here wherein the Midcaps outperform the Smallcaps
ABSOLUTE RETURNS
The chart shown earlier give relative returns i.e. Returns in EXCESS of the Nifty50. As done in the previous analysis, a Cumulative Relative Frequency charts shows the ABSOLUTE RETURN. You can see the same on my BLOG
CONCLUSION
For the period of April 2005 until August 2022 (around 17 years), the returns as well periods of excess performance (over Nifty50) of the Smallcap Indices are noticeably inferior to the Midcap Indices.
The same caveat mentioned in the previous analysis applies here too
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