After the correction, what’s next for small caps? Mirae Asset’s Varun Goel explains

After a sharp correction in several small-cap stocks, macro headwinds, and months of earnings pressure, investors are divided on whether the worst is over. While broader small-cap indices have remained volatile and largely range-bound, select active funds have managed to generate solid gains.

In this interaction with BT, Varun Goel, Senior Fund Manager at Mirae Asset Investment Managers (India), explains how disciplined bottom-up stock picking helped navigate through volatility, why he believes the earnings cycle is turning, and where he sees opportunities emerging across small-cap and domestic cyclical themes.

Small-cap indices have been flat, yet your fund has delivered strong returns. What helped you protect investors’ money and still generate gains in such a volatile market?

Bottom-up stock picking is key to creating long-term alpha, especially in small-cap funds. We have focused on identifying companies that can deliver strong earnings growth even in a tough environment. We have tried to identify businesses that have robust earnings visibility, prudent balance sheets, and scalable business models. Over a 3-5-year horizon, these can emerge as meaningful compounders. 

Why have small-cap stocks struggled since early 2025? Is this mainly because of weak earnings, high valuations, or global factors?

After 5-6 quarters of soft earnings growth, we believe we should see acceleration in earnings going forward, especially in the small-cap space, which also saw the biggest cut in the last 6 quarters. FY26 has turned out to be a year of growth rebound for India.  Significant monetary easing, GST and income tax cuts, good agricultural production and strong recovery in central government capex spends has resulted in a recovery of GDP growth. Going forward, this growth rebound should get further strengthened and reflect strong corporate earnings. Credit growth and corporate earnings are recovering, and infrastructure-led capex will get further strengthened in 2026.

How do you see current valuations in Indian equities, especially in mid- and small-cap stocks?

Valuations have become much more palatable now since the small-cap index has corrected almost 25% from the peak in the last 18 months. The earning cycle is already turning, and the recovery would get further strengthened in Fy27

What are the biggest risks small-cap investors should be careful about in the current market situation?

Over the last 20 years, the small cap segment has delivered strong earnings growth and market returns. Primarily, smaller companies often exhibit higher long-term growth potential in both earnings and business expansion. Their relatively unestablished nature makes them more agile, allowing them to respond swiftly to industry shifts and market disruptions. This adaptability often translates into faster growth, which the stock market tends to reward. However, it's important to note that this higher growth potential comes with correspondingly higher risk.

While global events remain a risk, we expect earnings growth for India's small caps to bounce back from a cyclical low in FY25. Small caps are inherently more volatile, and sharp corrections are part of the cycle. Historical trends show that when macro and sentiment-related headwinds ease, this segment tends to rebound strongly. Investors are increasingly allocating to this segment with the expectation of long-term wealth creation. However, it's important to remember that with higher growth potential comes heightened volatility and risk.

Do you expect earnings to recover, and is this a good time for retail investors to start or add to small-cap funds, or should they wait for more clarity?

We are hopeful of revival in consumption, which will likely lead to more discretionary spending, and are positive on manufacturing given the government’s thrust on the Make in India strategy.  Domestic cyclical stories like BFSI, Auto, and capital goods should also do well. We remain constructive on the lending space. The significant monetary easing carried out this year should lead to healthy growth for small banks, SFBs and NBFCs. The healthcare segment is geared towards healthy medium-term compounding, with hospitals and the diagnostics space seeing a strong shift from unorganised to organised. Also, we see a secular growth opportunity in the CRAMS (contract research and manufacturing) space.  The portfolio is more geared towards capturing domestic economic recovery stories in BFSI, Auto, Capital goods and manufacturing and cautious on export segments.

We believe that investors can look to increase allocation to small caps this year. They can put 50% now, and the remaining can be spread over the next 6-12 months through SIPs.

How could the ongoing and proposed trade deals between India and the US, and between India and the EU, impact Indian stock markets? Which sectors or themes are likely to be the biggest beneficiaries, and are there any sectors that could face near-term pressure?

The ongoing deals are significantly positive for labour-intensive sectors like textiles, gems & jewellery, aquaculture, leather, etc. The full benefit of the deals should be visible in the next 18 months.