Beaten-down small-caps begin to tempt MFs

The relief rally in small-cap stocks appears to have opened bargain hunting windows for mutual funds that recently avoided investments in new scrips in this segment, as beaten-down stocks begin to look more appealing.

- Mayur Bhalerao & Abhinaba Saha

Small-caps chased by retail investors over more than two years plunged nearly 24% from their most recent highs, before a rally over the last three days limited losses to 20%. However, it remains to be seen whether this momentum will continue and if the correction is truly over.

The small-cap rally over the last two to three years was largely driven by excess liquidity and a heightened risk-on sentiment, noted Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research. The BSE Smallcap Index surged over 28% in 2024 and an impressive 47% in 2023. But these stocks are now in bear market territory, and have shed 16.6% in 2025 alone.

The fall in valuations may trigger bargain hunting by professionally-run schemes which had adopted a wait-and-watch approach, experts said.

Anirudh Garg, partner and fund manager at Invasset PMS said the recent correction has certainly led to a more compelling valuation landscape in the small-cap segment, offering selective opportunities for long-term investors.