Largecap vs Midcap vs Smallcap: Understanding their relative risk-return

Markets are cyclical in nature driven by economic and business cycles further exaggerated by the psychology/behaviour of the market participants. While such market volatility impacts all segments of the market, the extent of volatility in mid & small-caps are substantially higher (leading to sharp outperformance in bull markets & sharp corrections in bear markets). 

Over the longer-term, mid & small-caps would outperform large-caps, but this comes with a high degree of volatility. This makes them more suitable for aggressive investors, and also a segment to be careful about in terms of capital losses during bear markets. 

Large, Mid and Small Caps Across Various Cycles

From April 2003 through Dec 2021, Indian markets have witnessed 8 bull and bear market phases, indicating 4 complete market cycles. In this blog, we study the relative performance of large, mid & small-caps across these different market cycles, to provide investors a better understanding of the relative risk-return across these 3 major market-cap categories. 

April 2003 to Dec 2007 | Global Bull Market led by Infra, Cap Goods and a booming RE market

During one of the strongest bull markets that Indian equities have seen, the outperformance of mid and small cap is very significant due to strong earnings growth on the back of strong economic and business uptick.

Jan 2008 to Mar 2009 | Global Financial Crisis

While the outperformance of mid and small caps was very strong in the previous period, the global financial crisis has led to a significant correction.

This undoing of mid and small-cap correction was led by valuation de-rating and a higher impact on earnings relative to stable businesses in large caps. 

Mar 2009 to Nov 2010 | Recovery from GFC

With central banks coming to the rescue, the stimulus of quantitative easing around the world has helped economies from facing severe depression.

Nov 2010 to Feb 2014 | Taper Tantrum and EM Outflows

Post the initial quantitive easing with a pullback in economic growth, a surprise announcement from the US Fed of slowing down bond purchases led to investors’ concerns over a potential recession, which marked a huge outflow from emerging market equities impacting the balance of payment and currency. 

Feb 2014 to Jan 2018 | Oil Price Collapse, Economic Recovery and NDA Victory

With the taper tantrum easing, the global markets between mid-2014 and early 2016, witnessed one of the largest oil price declines in modern history driven by a growing supply glut. Along with domestic factors such as the majority win by the NDA govt and recovering domestic economy, the Indian market has shown a strong recovery led by govt spending on infra and private consumption.

Jan 2018 to Jan 2020 | SEBI MF Tighter Regulations + IL&FS Default led NBFC Crisis + Economic Slowdown

While Indian economy growth was strong, certain technical factors such as tighter SEBI mutual fund regulations have led to the beginning of the mid and small cap correction. This was further exaggerated by the previous period’s economic policies such as demonetisation, GST, and RERA (initially deflationary in nature) and the collapse of IL&FS triggering a tightening in bond markets for NBFCs.

Jan 2020 to Mar 2020 | Covid Impact

While Covid-19 was first spotted in China, the implications of the virus were still unknown. With a global breakout, the health crisis had led to a lockdown around the globe bringing economic activity to an arrest. 

Mar 2020 to December 2021 | Recovery from covid lows

During the peak of uncertainty, the global central banks and governments have helped stabilise the economic impact with unprecedented stimulus.


From the data above, since 2003, we can clearly see the higher volatility in small and mid-cap companies due to associated reasons such as volatile earnings, less-established business models and management quality. Large-caps are relatively stable with established business models and usually better management in place.