The year 2024 turned out to be a stellar one for small-cap stocks on Dalal Street, delivering impressive returns for investors. Fueled by an optimistic stock market trend and active participation from retail investors, these market minnows stole the spotlight. Analysts credit the robust performance to strong domestic liquidity, sound economic fundamentals, and consistent government policies.

Record-Breaking Gains in 2024

The BSE small-cap index surged by an impressive 28.45%, gaining 12,144.15 points as of December 23, 2024. The midcap index followed closely, climbing 25.61% with a gain of 9,435.09 points. In comparison, the benchmark BSE Sensex rose by 8.72%, achieving a 6,299.91-point increase. The small-cap index reached its lifetime high of 57,827.69 on December 12, while the midcap index hit a record 49,701.15 on September 24. The Sensex also scaled new heights, touching 85,978.25 on September 27.

Factors Driving Growth

Experts attribute this exceptional performance to heightened domestic investor activity, including robust retail participation and systematic investment plans (SIPs). Abhishek Jaiswal, Fund Manager at Finavenue, noted, “Small-cap and midcap indices outperformed this year due to strong domestic liquidity, active retail investor involvement, and growth in sectors like defense, real estate, and infrastructure.”

While local investors primarily buy small-cap stocks, overseas investors focus more on blue-chip firms. This dynamic has bolstered midcap and small-cap performance, with domestic institutional investors consistently being net buyers throughout the year.

Historical Context and Sectoral Insights

Compared to 2023, when the BSE small-cap index rallied 47.52%, this year’s performance highlights a more sustainable growth trajectory. In 2022, the midcap index grew modestly by 1.37%, while the small-cap index declined by 1.80%. The Nifty 50 index, which tracks 13 economic sectors, saw its passive fund assets grow to ₹7.8 lakh crore as of September 30, 2024, with financial services holding the highest sectoral weightage at 32.76%.

Outlook for 2025: Cautious Optimism

Looking ahead, market experts maintain a cautiously optimistic stance for midcap and small-cap stocks in 2025. Key drivers include strong domestic consumption, government infrastructure projects, and reforms like the Production Linked Incentive (PLI) scheme. The outlook for 2025 is positive, underpinned by initiatives such as Atmanirbhar Bharat, PM Gati Shakti, and PLI, These reforms are expected to fuel growth in defense, manufacturing, infrastructure, and technology sectors, as per analysis. However, analysts caution that the rally may not be broad-based in 2025. Investors are urged to take a cautious and focused approach, as some sectors show stretched valuations while others experience restricted growth momentum. While the growth potential is strong, careful stock selection will be crucial in 2025, noted industry experts.