Nifty IT vs Nifty Smallcap 100: Which index should you pick for the long term?

Indian markets hit new highs earlier this month with the benchmark Nifty crossing the 20,000 mark on the back of robust buying by domestic investors and foreign investors and a successful G20 summit, which has drawn the attention of global investors towards the Indian markets.

Following the trend, the Nifty IT index as well as the Nifty Smallcap 100 also hit new highs earlier this month. While both of these indices have multiple tailwinds and a healthy growth outlook, let's analyse which of these has a better long-term opportunity for investors.

The Nifty IT index advanced over 27 percent to hit its 52-week high of 33,402.75 on September 15, 2023, from its 52-week low of 26,184.45, hit on April 17, 2023. However, the index is still over 15 percent away from its record high of 39,446.70, hit in January last year. Post hitting its year high earlier this month, the index consolidated a bit, down 4.5 percent to currently trade at 31,879.60.

The Nifty Smallcap 100 index, on the other hand, surged over 50 percent to its record high of 13,079.20 on September 12, 2023, from its 52-week low of 8,682, hit on March 28, 2023. It has also declined a bit post hitting its new peak and has lost over 3 percent to currently trade at 12,623.75.

Looking at YTD returns, Nifty Smallcap 100 is the better-performing index. The index has surged almost 30 percent in 2023 so far as against an over 11 percent rise in Nifty IT and an 8 percent gain in Nifty in this period.

In 2023 so far, both Nifty Smallcap 100 and Nifty IT have given positive returns in 6 of the 9 months.

Meanwhile, in the last one year as well, the Nifty Smallcap 100 outperformed both the Nifty IT and benchmark Nifty. Nifty Smallcap 100 surged almost 37 percent in the last 1 year while Nifty IT advanced 18 percent. In comparison, the benchmark Nifty added 16 percent in this period.

Similarly, in the long term, Nifty Smallcap 100 has given better and multibagger returns between the two. The smallcap index has rallied over 115 percent in the last 3 years while Nifty IT is up 61 percent and Nifty has gained 74 percent.

Constituents

In the Nifty Smallcap 100, 5 stocks have given multibagger returns in 2023 YTD whereas, there are no multibaggers in the Nifty IT index this year so far.

Mazagon Dock is the top performer in the smallcap space, surging 176 percent followed by Suzlon Energy, up 142 percent, Zensar Tech - 141 percent, BSE - 138 percent and Cyient - 109 percent.

Apart from these, 21 stocks have jumped between 50 and 97 percent this year so far. Jindal Stainless, CE Infosystems, Glenmark Pharma, KIE Industries, MRPL, Amber Enterprises, and Intellect Design Arena are some of those stocks.

However, Brightcom was the top loser in the smallcap space, down over 36 percent, followed by Delta Corp, down 34 percent and City Union Bank, down over 30 percent.

On the other hand, in the Nifty IT index, of the 10 constituents, only one was in the red in 2023 YTD.

Persistent Systems was the top performer in the Nifty IT index, up over 48 percent, followed by Coforge, up 31 percent. L&T Tech, Tech Mahindra, Mphasis, and LTIMindtree also rose over 20 percent each in 2023 YTD. Meanwhile, HCL Tech advanced over 19 percent, TCS added 9 percent and Wipro rose 3 percent in this period.

However, Infosys was the only constituent in the red in 2023 so far, down 4.5 percent.

Which index has a better long-term investment opportunity?

Vinod Nair, Head of Research at Geojit Financial Services prefers Nifty IT between the two.

Historically, both segments have provided decent and equally comparable performance in the long term. However, considering the solid performance of smallcaps in the last 6 months, it will be a challenge to maintain the trend in the short term. While, IT sector performance was muted due to a slowing global economy, which is expected to improve in 2024, proving a better bargain for investment today, said Nair.

“The Indian IT sector is experiencing a recovery, although it faces near-term headwinds due to the prolonged high-interest rates in the U.S. However, the Fed's anticipated reduction in inflation next year suggests a soft landing in the U.S., which could benefit the Indian IT sector. Meanwhile, increased client confidence has led to significant deals, enhancing the revenue outlook. While short-term corrections are conceivable, a deep correction is not anticipated, offering attractive valuations for long-term investors,” he said.

Mohit Jain, research analyst, Anand Rathi Institutional Equities, also likes Nifty IT.

“At a broader level and within the IT sector, we do not see much difference between the expected returns for small caps and large caps. There are selected opportunities at both ends but large caps at the index level may give you better risk-adjusted returns over smaller peers. This is from a one-year standpoint,” said Jain.

IT stocks are recovering as fears of a steep US recession have moderated and deal award activity has remained steady. This offers viability to FY25 growth. On the cost side, rupee depreciation and eased up supply situation should help, he said.

“Fundamentally we don't see headwinds ahead. The performance should be steady in Q2 and then improve in H2.”

On the contrary, Gaurav Bissa, VP, InCred Equities, has picked Nifty Smallcap over Nifty IT.

“Nifty Smallcap Index looks better compared to Nifty IT in the long term. The smallcap index has witnessed a strong breakout on monthly charts and has entered fresh life levels implying the trend is very strong and a meaningful correction will provide a lucrative buying opportunity. Nifty IT on the other hand is still well below its life-high levels. While the index is in a multiyear uptrend, the structure is not as strong as that of the smallcap index,” said Bissa.

Suman Bannerjee, CIO, Hedonova, as well, has chosen the smallcap index.

"I think that when it comes to long-term investment opportunities over 15-20 years, small-cap stocks are the best. According to me, they often exhibit more growth potential and are undervalued, which can lead to higher returns over time.

I think small-cap stocks are still fairly valued, with some remaining undervalued. However, in the last few months, smallcaps have seen significant increases in value, and this might lead to corrections in the coming months. Investors should consider waiting for a correction before making their investments," said Bannerjee.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.