Many large caps index may not beat index but on an absolute basis they are still returning 14-15% return.
You are comparing returns of highly risky and volatile small/microcaps caps that see large drawdowns against more stable and less risky large caps. You are essentially saying that you see equal risk (of losing your capital) between investing in say a 500 crore microcap company, based on tip, versus say a Titan or L&T.
If one factored in risk premium, 16% return on large caps is much better than 20% return on small caps for the same capital deployed. On the other hand, 12% return on large caps will be seen worse than returns offered by 8% in FD (zero risk).
Before you set your return target you need to determine risk premium that you are carrying in your portfolio and and then calculate opportunity cost (foregoing a better return opportunity). So if you are targeting 16% return on small caps, you incur an opportunity cost compared to Small Caps index return as well as small caps mutual funds whose returns are in the range of 18-25%.
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