Is 2025 A Suitable Time To Explore Small Cap Investments?

As 2025 is drawing to its last quarter, many investors are wondering if it is the suitable time for them to tap into small cap investment opportunities. But is the timing suitable? Let’s explore the potential opportunities and risks in small cap investing in 2025.

Table of contents

• Historical performance of small cap stocks
• Why are investors considering small caps in 2025?
• Potential risks associated with small cap investments
• Key factors to evaluate before investing
• Role of small caps in a diversified portfolio
• Expert outlook on small cap investments in 2025

Historical performance of small cap stocks

Small caps are companies ranking 251 and beyond in terms of market capitalisation and their stocks are considered high-risk as well as assets with growth potential. Small cap stocks have delivered returns during economic upturns and bull markets in the last two decades. In fact, many small cap funds have outperformed large and mid caps in recent years as per a few surveys. However, small cap stocks can also show sharp downturns during market corrections.
Past performance may or may not be sustained in the future.

Also Read: What are small cap funds?

Why are investors considering small caps in 2025?

Here are the potential benefits of small cap stock that investors may consider when planning to invest in 2025.

• Economic recovery: The Indian economy seems to be relatively stabilising post global slowdowns and smaller companies might see periods of growth potential ahead.
• Government support to MSMEs: Since the government is continuing its focus on the potential growth of Micro, Small and Medium Enterprises (MSME), many small businesses are expected to potentially grow from increased demand and government support.
• Relatively Suitable valuation: Valuations in the small cap space have been observed to be relatively suitable this year making entry favourable for long-term investors. Consequently, more investors are exploring small cap investments in 2025.

Past performance may or may not be sustained in the future.

Potential risks associated with small cap investments

Here are the risks in small cap investing to know about:

• High volatility: Small cap stocks tend to often react sharply to news, economic shifts, or investor sentiment. This is why small caps are not recommended for investors with a short-term mindset.
• Lower liquidity: These stocks tend to have lower trading volumes, which may make it harder to exit large positions quickly. Small cap investments may be considered suited for a longer investment horizon.
• Lack of data: Some small cap companies may not have established track records which may make it tough to make informed investment decisions. Furthermore, small caps may not receive as much attention from analysts and media as large caps. This is one of the main reasons why risk-averse investors tend to choose large caps when they consider small cap vs. large cap in 2025.

Key factors to evaluate before investing

Investors are advised to consider these factors to potentially mitigate risks in small cap investing:

• Company fundamentals: This is considered a non-negotiable factor when tapping into small cap investment opportunities. Investors are urged to look at the growth potential, debt levels, cash flows, and management quality of small cap companies before picking stocks.
• Sector exposure: While small cap investments tend to carry a higher level of risk as compared to large caps and mid caps, some sectors like manufacturing, chemicals, or niche tech may offer more favourable risk-adjusted return potential in small caps.
• Track record of the fund manager: If you want to invest in small cap funds then you are advised to choose the mutual fund schemes that have been performing relatively suitable and are managed by fund managers with a decent track record.

Past performance may or may not be sustained in the future.

Role of small caps in a diversified portfolio

Investments in small caps may be a suitable addition to a diversified portfolio whether you invest via mutual funds, ETFs, IPOs, or directly buy stocks. Most investors may consider dedicating 10% to 20% of their equity allocation to small caps depending on their risk appetite. Aggressive investors may allocate a larger chunk of their portfolio to small caps to potentially create wealth over a long horizon. SIPs in small cap mutual funds may be a suitable way to enter gradually, and tools like an SWP calculator may help plan future withdrawals in a tax-efficient manner.

The calculator is an aid, not a prediction tool. It may provide only an indicative picture.

Also Read: How Can You Build a Diverse Portfolio With Small Cap Mutual Funds?

Expert outlook on small cap investments in 2025

Many market experts believe that 2025 might be a relatively suitable year for small cap investments since the earnings growth potential for small caps is expected to be robust by 2025-26. Some industry sectors such as chemicals, technology, AI and renewable energy also seem to show promise. Mutual fund inflows in small cap funds have also seen a relatively steady rise in recent times, reflecting growing investor confidence.

In conclusion, this may be considered a suitable time to explore small cap investments in 2025 in India since the current economic environment and market valuations suggest a positive outlook. However, investors are advised to approach investments in small caps with a long-term view and diversify their portfolio appropriately to mitigate risks. Consulting a professional may also help in avoiding making speculative decisions triggered by sudden market movements or noise in the short run.

FAQs:

What are small cap investments?

Small cap companies, by definition, are companies ranking 251 onwards in terms of market capitalisation. Investments made in small cap companies are referred to as small cap investments.

Are small cap stocks riskier than large or mid cap stocks?

Yes, there are risks involved in small cap investing. Small cap stocks are considered to be more volatile than large or mid cap stocks. However, they also offer the chance to earn potential returns from an investment, especially over a long horizon.

How do small caps perform during economic recovery?

Small cap stocks have the potential to outperform large cap stocks during economic recovery since smaller companies tend to grow when demand picks up. They may benefit quickly from improving economic conditions, rising consumer spending, and increased business activity.

Is 2025 a suitable year for beginners to invest in small caps?

Market experts have been predicting potential growth for the Indian economy in the coming years. Hence, it may be considered a suitable time to look for small cap investment opportunities. If you want to invest gradually, you may begin small cap investments in 2025 in mutual funds with a Systematic Investment Plan (SIP).

What is a suitable way to invest in small cap companies?

There are four ways to make small cap investments in 2025 including investing in small cap mutual funds, investing directly into stocks of small cap companies, investing in small cap Exchange-Traded Funds (ETFs), and Initial Public Offerings (IPO) of small enterprises. However, if you want to mitigate the risk your investment is exposed to while reaping the potential benefits of small cap stocks, the most suitable way may be starting an SIP in small cap funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.

The content herein has been prepared on the basis of publicly available information believed to be reliable. However, Bajaj Finserv Asset Management Ltd. does not guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The tax information (if any) in this article is based on current laws and is subject to change. Please consult a tax professional or refer to the latest regulations for up-to-date information.