Large-caps underperform mid- and small-caps over 3 years: Why you should look beyond the index

The large-cap segment has underperformed the mid- and small-cap segments over the years, but a closer look at individual stock performance suggests that the weakness may not be as broad-based as the headline index returns indicate.

According to the NSE website, the Nifty 50 has delivered a 6.04% return in the last 3 years, compared with 14.60% for the Nifty Midcap 150 and 14.42% for the Nifty Smallcap 250.

However, among the Nifty 50 stocks, only 10 have delivered negative returns in the last 3 years.

Which stocks are dragging Nifty 50 returns in the last 3 years?

ITC has been the biggest laggard among the Nifty 50 stocks, with a three-year negative return of 14.05%. It was followed by TCS, Infosys, Asian Paints and Wipro.

This means that 40 out of 50 Nifty stocks have remained in positive territory over the three-year period, indicating that the index's relatively modest return has been influenced disproportionately by a small group of laggards.

The picture changes depending on the investment horizon. Over the five-year period, only seven Nifty 50 stocks have delivered negative returns, with Wipro being the biggest laggard at -12.33%.

However, over the last one year, 27 Nifty 50 stocks are in negative territory, with ITC declining the most by 35.35%.

Does the broader large-cap universe tell the same story?

The Nifty 100 provides a wider view of the large-cap universe by covering the top 100 companies. Here too, the weakness appears relatively concentrated.

Only 15 Nifty 100 stocks have delivered negative returns in the last three years, with ITC again at the bottom.

Since the Nifty 100 includes all Nifty 50 constituents, the data suggests that adding another 50 large-cap stocks does not dramatically increase the number of long-term laggards.

For investors, this is an important distinction. Weak index-level returns do not necessarily mean that the entire large-cap universe has performed poorly.

What about Nifty Next 50?

The Nifty Next 50, which consists of the next 50 companies outside the Nifty 50, presents an even narrower picture.

Only a handful of stocks have delivered negative three-year returns, including LTM, Godrej Consumer Products, Shree Cement, and others.

In the five-year period, six stocks were in negative territory, while 21 stocks have posted negative returns in the last one year.

What should investors take away?

The comparison shows why investors should not judge an entire market-cap segment solely by its index return. While the Nifty 50 has lagged the mid- and small-cap indices, the weakness has been concentrated in a relatively small group of stocks.

Looking at the underlying stocks and understanding what is driving the index can provide a clearer picture of where the actual weakness lies.

Disclaimer: This is purely for educational/informational purposes and should not be taken as any sort of investment advice. Always consult a SEBI-registered advisor before making any investment decisions.