Mid-Cap and Small-Cap Stocks: A Long-Term Route to Wealth Creation

Mid- and Small-Cap Investing Offers Attractive Opportunities for Investors

For most people, the path to riches often involves investing in mid- and small-cap companies. This is because the opportunity set in these segments is broader, with the Nifty MidSmallcap 400 index covering more industries than the Nifty 100.

Historically, mid- and small-cap companies have demonstrated stronger growth. Between FY20 and FY25, revenue growth was approximately 82 per cent, compared with 74 per cent for large caps. Similarly, profit growth was around 256 per cent for mid- and small-cap, compared with 211 per cent for large-cap during the same period.

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Mid-cap companies in the F&O segment rose from 63 in 2021 to 93 in 2026, while small caps rose from 5 to 25. Over the past 15 years, mid- and small-caps outperformed large caps in most periods.

Specialised Investment Funds (SIFs) are the best vehicle for investing in the mid- and small-cap segments. Like a mutual fund, a SIF pools capital within the framework set by SEBI but offers greater flexibility in portfolio construction, akin to a PMS. Within SIFs, the Equity Ex-Top 100 Long-Short strategy avoids large caps and focuses on mid- and small-cap stocks, making it the ideal vehicle.

Why Invest Now?

The timing argument for mid- and small-cap (SMID) investing is based on a simple but often overlooked reality: corrections reset both expectations and valuations. With recent market corrections, nearly 75 per cent of mid-cap stocks and about 82 per cent of small-cap stocks have fallen more than 20 per cent from their 52-week highs.

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Valuations reflect this reset. After peaking at roughly 39 times earnings in September 2024, SMID valuations have corrected and are hovering between 25-30 times. This level is below the five-year average. In practical terms, the market is offering access to growth businesses at multiples that are closer to historical averages.

Strategies for Capturing the SMID Opportunity

Strategies that can selectively capture the SMID opportunity set by a combination of long and short positions can become particularly relevant. One such approach is the Altiva Equity Ex-Top 100 Long-Short Fund. The strategy is designed to maintain a meaningful exposure to the SMID universe, typically ranging between 65 per cent and 100 per cent, while retaining the flexibility to manage risk and enhance returns through derivatives and selective short positions.

The investment philosophy behind this strategy rests on a four-part framework focused on forensics, acceptable pricing, investment-style agnosticism, and robustness of business models. This means the emphasis is not merely on identifying fast-growing companies, but on selecting businesses with credible standards, scalable opportunities, and sustainable earnings power.

The core source of alpha here is flexibility and conviction. The fund is sector-agnostic, allowing it to move capital to where opportunities are most compelling rather than where an index dictates exposure. The strategy will maintain a concentrated portfolio of roughly 35 to 45 stocks, each selected based on bottom-up conviction.

Another important aspect is the focus on accounting quality, governance standards, and ownership background before capital is allocated. In the SMID space, where information gaps and business risks are often higher, this forensic approach becomes particularly relevant.

Under this strategy, over 65 per cent of assets are allocated to companies ranked between 101 and 750 by market capitalisation, ensuring a clear focus on the SMID space. The balance between mid-cap and small-cap exposure is managed dynamically, broadly aligned with a flexible SMID allocation framework.

In essence, the current environment combines two favourable conditions for SIF: a valuation reset and a broad opportunity set. Strategies that can navigate this with discipline, flexibility, and conviction are better positioned to translate that setup into consistent alpha over time.