Small Caps Crashed 30% in 2025: Is 2026 the Ultimate Buying Opportunity? Insights from Pawan Bharaddia
The Indian small-cap segment endured a punishing year in 2025, with roughly 80% of stocks declining 30% or more over the past 14 months. Many small-cap mutual funds posted negative returns, marking one of the sharpest corrections in recent memory. Valuations, once stretched to unsustainable levels amid heavy retail inflows, have now moderated significantly, trading at levels closer to their 10-year historical averages—with only a modest 12% premium remaining.
In a recent episode of the Finance With Sharan podcast (FWS 95), host Sharan Hegde sat down with Pawan Bharaddia, Co-Founder and Chief Investment Officer of Equitree Capital, a SEBI-registered investment advisor managing substantial assets in small- and mid-cap strategies. With over 27 years of market experience, Bharaddia has navigated multiple cycles, building a track record that includes several multibagger investments (stocks delivering 40x or more returns). His firm’s concentrated portfolio has reportedly delivered a 34%+ CAGR over the past five years (post-fees and expenses), significantly outperforming benchmarks like the S&P BSE 500 TRI.
Bharaddia views the 2025 downturn not as a sign of structural weakness, but as a healthy reset that has created one of the most compelling opportunities for patient investors heading into 2026 and beyond. He points out that while prices corrected sharply, underlying business fundamentals have begun to recover, with revenue growth resuming at around 13% year-over-year in the recent first half. This divergence—falling prices amid returning earnings momentum—sets the stage for potential strong compounding ahead, especially in high-quality small caps tied to India’s long-term growth story.
Central to Bharaddia’s thesis is India’s structural tailwinds: sustained GDP growth of 6.5–7.5%, a young demographic (average age 28) driving aspirational consumption, government initiatives like Make in India and PLI schemes, and global shifts favoring India as a manufacturing hub (e.g., “Europe+1” strategies amid aging populations abroad and geopolitical disruptions). Key sectors he favors include:
- Manufacturing and exports — Companies gaining competitiveness in quality and cost, particularly auto ancillaries and engineering firms supplying global giants (e.g., to Germany).
- Defense — Explosive export growth at a 35% CAGR over five years, alongside railway and electronics products.
- Infrastructure ancillaries — Benefiting from massive government spending on roads, metros, airports, and related inputs (e.g., bitumen handling players capturing large market shares).
- Consumption-oriented businesses — Fueled by rising aspirations and a shift toward better-quality products.
Bharaddia’s investment style stands out for its private-equity-like discipline in public markets. He runs a highly concentrated portfolio of just 12–15 stocks, treating them like business partnerships with long holding periods averaging 6–7 years (and often longer). The approach emphasizes deep conviction: backing proven promoters with decades of transparent track records, large addressable markets, and visible execution for the next few years. He filters rigorously—preferring companies operating for 20+ years to weed out failures—and avoids areas he doesn’t fully understand, such as real estate developers (due to cash-flow opacity) or certain new-age tech plays.
He stresses that small caps carry high risk: around 70% of companies in the space historically destroy value, with many prone to 60–70% permanent declines. Wealth creation, he argues, comes from the rare winners that compound earnings at 20–25% annually over extended periods, not from frequent trading or chasing momentum. His fund’s fee structure reflects this alignment—performance fees only kick in after investor capital doubles.
Examples from his experience illustrate the power of patience. In one case, a holding delivered 40x returns over seven years, including several flat years during R&D phases before explosive growth. Bharaddia advises that small caps suit aggressive, long-term investors (suggesting 30–40% allocation for those with high risk tolerance), while cautioning retail participants against overexposure or short-term bets.
As 2026 unfolds, Bharaddia remains optimistic that disciplined, bottom-up selection in small caps—focusing on real business growth rather than hype—could deliver outsized rewards. The deep correction of 2025, he believes, has cleared excesses and positioned high-conviction names for India’s next phase of manufacturing-led, export-driven expansion.
While past performance offers no guarantees and volatility remains inherent, the conversation underscores a classic contrarian view: when fear dominates and valuations reset, opportunity often emerges for those willing to stay invested through the cycles. Investors considering small caps should weigh their risk appetite, time horizon, and ability to focus on fundamentals over noise.
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