A Mint analysis showed that year-to-date, BSE mid-cap and BSE small-cap indices rose 7.90% and 3.12%, respectively, while BSE Sensex, BSE 100, BSE 200, and BSE 500 indices dropped 5.60%, 4.01%, 2.39% and 1.91%, respectively.
In 2014, while mid-cap and small-cap indices rose 46.42% and 62.91%, respectively, BSE Sensex, BSE 100, BSE 200, and BSE 500 indices logged 29.89%, 32.28%, 35.47% and 36.96%, respectively.
Over the last 10 years, mid-cap and small-cap indices have outperformed Sensex for five years.
“Overall, despite the correction we have seen in the recent past, we are still in the bullish zone, and whenever that is the case, mid-cap and small-cap outperform," said market analyst Ambareesh Baliga, adding that one needs to have mid-caps and small-caps in the portfolio for an optimum mix.
“People start looking for newer ideas that come in from small-cap and mid-cap stocks. Domestic funds have stacked up a lot of large-caps, and when fresh money comes in, they need to keep diversifying. Hence, the interest towards mid and smaller space rises," added Baliga.
According to data from Capitaline, domestic institutional investors’ (DIIs) stake in constituents of the BSE small-cap index rose to its highest in at least three years, at 5.14%, in the quarter ended September. For BSE mid-cap companies, this stake reached its highest in the June 2015 quarter at 6.52%, since at least the quarter ended December 2012. It trimmed to 6.46% in the September quarter.
Of 84 mid-cap stocks in the BSE mid-cap index, 53 have posted positive returns so far in 2015, while of 770 companies in the small-cap index, 426 have logged stock market gains this year.
“Mid-cap and small-cap stocks are outperforming, as people perceive the pockets in these universes offer higher scope for earnings growth," said Ajay Bodke, chief executive officer and chief portfolio manager (portfolio management services) at Prabhudas Lilladher Pvt. Ltd.
While Sensex trades at 1-year forward price-earnings of 17.45 times, BSE mid-cap index and BSE small-cap index trade at 20.83 times and 17.83 times, respectively, data from Bloomberg showed.
All the three indices trade at a premium to their five-year average of 15.51 times, 19.03 times and 16.70 times, respectively.
“The outperformance from here would be dependent on how strong is the recovery in investment cycle. I believe that it may narrow for a bit, but will still continue for a while," added Bodke.
The top performers in the BSE mid-cap index were Ashok Leyland Ltd, 3M India Ltd, and Bajaj Finance Ltd, which gained 84.41%, 77.35% and 60.18%, respectively.
The best performers in the BSE small-cap index were Intrasoft Technologies Ltd, Rajesh Exports Ltd and Gayatri Projects Ltd, which advanced 688.51%, 384.86% and 352.33%, respectively.