Large Caps and Gold: Strategic Shields for Investors

The small-cap and mid-cap segments have had a remarkable rally over the past two years, with Nifty Smallcap 100 and Nifty Midcap 100 delivering returns of over 78% and 70%, respectively. But the tide seems to be turning as these indices enter a cooling-off phase.

Currently, the Smallcap index has corrected by 20%, while the Midcap index is down 16% from their all-time highs. Is this just a healthy breather or a sign of deeper challenges? In this article, we’ll explore past corrections, current trends, and what they could mean for the investors.

In September 2024, I highlighted how an index often returns to its mean after extended bull runs. This perspective provides valuable context as we examine whether the current decline signals a temporary pause or the onset of a bigger market correction.

The below data reveals the patterns in the correction cycles of the Nifty Smallcap 100 and Nifty Midcap 100 indices.



Historically, the small-cap index has endured extended phases of weakness, with corrections lasting up to 837 trading days and a significant 67% decline between 2018 and 2021, while the mid-cap index fell 51% over 736 trading days during the same period. However, this phase includes the COVID-19 pandemic period, which severely disrupted the Indian as well as global markets.

Currently, the small-cap index is down 20% over 34 trading days, while the mid-cap index has corrected by 16% over 88 trading days. This indicates that the small-cap segment has reacted more sharply within a short period.

On an average, the Nifty Smallcap 100 has witnessed a correction of 23%, while the Sensex has delivered an average return of 8% during these phases. For the Nifty Midcap 100, the average correction is 16%, with the Sensex is showing an average gain of 4%. Although currently Sensex is down by about 7% to 10% compared with these indices but it is still outperforming them. The chances of Sensex or largecap stocks outperforming even if there is longer correction are high from here on.

Now, what should investors do in such market corrections? Investors should consider diversifying into large-cap stocks and commodities like gold. Large caps tend to provide stability and resilience due to their stronger market positioning and steady earnings, often outperforming smallcaps and midcaps during volatile periods. In this article I highlighted how Gold acts as a safe-haven asset, historically gaining value during market downturns. By spreading investments across these asset classes, investors can reduce overall risk and better navigate market downturns without facing major losses to their portfolios.