The "size premium" is one of the most studied phenomena in financial economics.
United States Evidence
Indexes: S&P 500 vs S&P SmallCap 600 (1994–2024 approx)
| Index | Long-term CAGR |
|---|---|
| S&P 500 | ~10–11% |
| S&P SmallCap 600 | ~11–12.5% |
💡 Fama & French identified "Size Factor" (SMB – Small Minus Big) as a systematic risk premium.
India Evidence
Indexes: Nifty 50 vs Nifty Smallcap 250
| Index | Long-term CAGR |
|---|---|
| Nifty 50 | ~11–12% |
| Nifty Smallcap 250 | ~14–16% |
💡 Small caps have historically outperformed in India!
The Caveat: Drawdowns
- ⚠️2008: Small caps fell 70–80%
- ⚠️2018: Extended underperformance phase
- ⚠️Outperformance is cyclical
Why Small Caps Outperform Long-Term?
- Higher growth runway
- Lower institutional ownership
- Liquidity premium
- Information inefficiency
Cycle Behavior
❌ Avoid
- • Tightening cycles (underperform)
✓ Ensure
- • Liquidity expansion (outperform strongly)
Key Takeaway
Strategic allocation of 15–30% (depending on risk profile) can enhance portfolio returns over the long term.