The Indian equity markets have witnessed a significant downturn in January, with the pain being particularly acute in the small-cap segment. While the broader headline indices have faced pressure, the sell-off has been far more pronounced among smaller companies, highlighting a stark divergence in market performance.
Small-Cap Index Underperforms Benchmarks Sharply
The BSE Smallcap index has dramatically underperformed the benchmark indices this month. On a month-to-date basis, the small-cap index has recorded a steep decline of 9%. This is more than double the 4% loss that the Sensex has suffered so far in January, underscoring the heightened volatility and risk in the small-cap space.
Retail Investors Bear the Brunt of the Bloodbath
This sharp correction is especially challenging for retail investors, who are typically among the largest shareholders in the small-cap segment. Amid the ongoing market turmoil, investors have cumulatively lost nearly ₹5.6 lakh crore, a staggering figure that reflects the widespread impact of the downturn.
Out of approximately 1300 companies that constitute the BSE Smallcap index, around 500 have experienced declines of 10% or more in January alone. Furthermore, nearly 1050 stocks are trading in negative territory, signaling the extensive nature of the sell-off across the small-cap universe.
Global and Domestic Factors Fuel the Sell-Off
Widespread risk-off positioning and cautious participation have been evident in the Indian stock market. Investor sentiment is being weighed down by concerns over global trade tensions and geopolitical developments, coupled with persistent selling by foreign institutional investors.
The lack of a concrete India-US trade deal, along with rising geopolitical uncertainty following US President Donald Trump's tariff threats on the EU over Greenland, has prompted investors to shift their focus towards precious metals as a safe haven, away from equities. Additionally, a mixed earnings season has further dampened market morale, contributing to the downward pressure.
Notable Losers in the Small-Cap Space
According to data from Capitaline, 483 small-cap stocks have crashed by over 10% this month. Balu Forge has emerged as the worst performer, plummeting by a massive 34% as of January 22. The stock, which is part of Ashish Kacholia's portfolio, has fallen from ₹604.45 at the end of December to ₹397.9 at the last closing price, following income tax raids at the company's premises.
Barring January 13, Balu Forge shares have declined in all trading sessions this month and are now trading at levels last seen in July 2024. Other significant losers include Kiri Industries, Systematix Group, and Woth Investment, each down by 33% so far this year.
Tejas Network, whose shares have slumped to 52-week lows, has lost 28% this year and ranks among the worst-performing small-cap stocks of 2026. The Tata group company recently reported a consolidated net loss of ₹196.55 crore in the third quarter of FY26, compared to a profit of ₹165.67 crore a year ago, which has severely impacted investor sentiment.
Godfrey Phillips, another small-cap laggard, has seen a sharp 25% decline following the government's announcement of an excise duty hike effective next month. Newgen Software shares have crashed 23% this month as investors expressed disappointment with the company's December-quarter performance.
Other top losers from the small-cap space include Allied Blenders, Landmark Cars, Sapphire Foods, Sigachi Industries, Motisons Jewellers, Ramco Systems, and GTPL Hathaway, highlighting the broad-based nature of the downturn.
Expert Views on Valuations and Investment Opportunities
Despite the recent correction, valuations in the small-cap space remain significantly above historical averages, according to N. Aruna Giri, CEO of TrustLine Holdings. Before this correction, the small-cap index was trading at around 28–30x trailing earnings. Post the fall, valuations have moderated to about 25–26x, but this still represents a substantial premium to long-term averages.
At a broader market level, small and mid caps continue to appear expensive, and it would be naive to rule out further pain in this segment, the expert cautioned. However, he believes that for truly bottom-up and selective investors, many compelling opportunities are emerging across small and mid-caps, provided one is extremely choosy in stock selection.
"This is not a universal buy-on-dips market, nor is it a market to completely stay out of. It is a market that rewards a selective bottom-up stock-specific approach," he opined.
Wealth Creation Potential Amid the Carnage
Meanwhile, G Chokkalingam, Founder and MD at Equionomics Research, suggested that weakness in mid and small-cap names could persist until March. However, he opined that for those looking to create wealth over the next one to two years, this carnage presents a valuable opportunity.
"It will be a little riskier. But substantial wealth can be created in the next one to two years by those who buy till March," he said, emphasizing the potential for long-term gains despite the current volatility.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
