Lets understand an important structural shift in India’s equity markets post-COVID. Let’s unpack the narrative and address key question.

What Changed Post-COVID?

Earnings Growth Exploded

Between FY10–FY20: Earnings were stagnant around ₹4 trillion annually.

Post-COVID: Jumped to ₹7 trillion in FY21, heading toward ₹15 trillion in FY25.

Much of this earnings delta came from mid and small-cap companies, which had previously lagged.

Operating Leverage at Play

Many mid & small caps had fixed costs. When demand recovered post-COVID, profits surged faster than revenues.

Government’s push on PLI schemes, infrastructure, and formalization also favoured nimble, smaller businesses.

Liquidity Boost & Retail Participation

Low interest rates globally and in India post-COVID.

Explosion of new retail investors via platforms like Zerodha, Groww.

This capital flowed more easily into small/midcaps due to lower float.

Return Comparison (5-Year CAGR)

Index                             5-Year CAGR

Nifty 100 (Large)         13.6%

Nifty Midcap 100        23.3%

Nifty Smallcap 100      20.9%

This kind of outperformance historically happens when:

There’s an earnings re-rating

There’s a valuation expansion

There’s a macro tailwind (like GDP boost, reforms, or liquidity)

Can We Expect Similar Returns Again?

Probably not as easily. Here's why:

Base effect is real. The bounce-back from COVID was sharp.

Valuations in small/midcap are now relatively rich. Many trade above historical P/E averages.

Earnings growth may moderate unless India consistently grows >8% GDP—low probability

But yes, it's possible if:

You are selective — avoid junk rallies, stick with companies with real earnings, clean balance sheets.

You have mental discipline — to hold during drawdowns and avoid panic.

You buy at reasonable valuations — even good companies become bad investments if bought too expensive.

Final Thoughts

This post-COVID rally was fundamentally driven (earnings), not just liquidity. That's a strong foundation. But expecting similar double-digit alpha in mid & smallcaps going forward requires discernment.

Don’t chase momentum — study earnings growth.

“Time in the market beats timing the market — but only if you’re in quality.”