The Indian share market is continuously moving towards a juncture where diversification and market coverage are becoming broader than ever before. Taking a major step in the direction of this comprehensive development, NSE has launched a new index, the Nifty SmallCap 500. This index attempts to cover the smallcap universe on a large scale, giving investors an opportunity to understand the direction of India’s small but emerging businesses more clearly.
Let us understand the Nifty SmallCap 500 index in detail, what it is and what it implies for investors.
What’s Happening?
This new index launched by NSE tracks the performance of a total of 500 smallcap companies. It is designed to track the performance of 500 small-cap stocks, selected based on full market capitalisation, following the Nifty Midcap 150 Index. The index is constructed based on free-float market capitalisation so that the weightage reflects the actual market share.
The Nifty SmallCap 500 was launched on January 23, 2026. Its base year is kept as 2005 and the base value as 1,000. The calculation of the index is done on an End-of-Day basis, and its objective is to provide a balanced and deep representation of the smallcap market.
This index can also become a base for benchmarking, index funds, ETF launches, and various structured products, giving investors transparent access to the smallcap market.
Methodology and Eligibility of the Index
- The methodology of this index is quite strict and transparent. To be included in it, companies have to fulfill certain specific eligibility criteria:
- Ranking: Companies have to make a place in the top 1000 companies based on the average daily turnover and average daily full market capitalisation of the last six months.
- Exclusions: Stocks that are part of Nifty 100 or Nifty Midcap 150 are not eligible for this index. Also, if a company’s rank is within the top 225 based on average daily full market capitalisation, it will also not be included.
- Mandatory Inclusion: All stocks that are part of the Nifty Smallcap 250 index will remain part of the Nifty SmallCap 500 index at all times.
- Rebalancing: The index will be rebalanced twice a year, i.e., on a semi-annual basis. The cut-off dates for this have been set as January 31 and July 31.
Sector and Stock Performance
If we look at the data of this index, it presents an interesting mix of various sectors. According to the data as of December 31, 2025, the ‘Financial Services’ sector has the highest weightage in the index at 20.76%. After this, ‘Capital Goods’ is in second place with 14.40% and ‘Healthcare’ in third place with 12.46%. Other major sectors include Chemicals (6.63%), Automobiles (6.37%), and Fast Moving Consumer Goods (5.01%).
Talking about stocks, ‘Multi Commodity Exchange of India Limited’ (MCX) is at the top of the index with a 2.03% weightage. This is followed by ‘Laurus Labs Limited’ (1.54%) and ‘Radico Khaitan Limited’ (0.92%).
In terms of returns, in the year ending December 31, 2025, this index has struggled a bit. In the last 1 year, it has given a Price Return of -7.38% and a Total Return of -6.89%. However, the picture is positive in the long term. In the last 5 years, the index has given a return of 23.58% (Price Return) and 24.47% (Total Return). Since its inception until now, it has recorded a 15.14% CAGR (Price Return) and 16.49% (Total Return).
On the front of fundamental valuation, the Price-to-Earnings (P/E) ratio of the index is 28.94 and the Price-to-Book (P/B) ratio is 3.37, while the dividend yield is 0.73%.
What Does This Mean for Investors?
The launch of Nifty SmallCap 500 opens many new doors for investors. The most important thing is that it provides an accurate standard for benchmarking fund portfolios. Now fund managers can compare the performance of their small-cap oriented funds with a broad 500-stock index, which was previously limited.
Apart from this, this index will become the base for new investment products. It can be used to launch Index Funds, Exchange Traded Funds (ETFs), and structured products. This means that in the future, investors will be able to get diversification across 500 small-cap companies simultaneously by investing directly in this index. This is particularly beneficial for those investors who want to be a part of the small-cap growth story without the risk of choosing individual stocks.
What’s Next?
Even though a negative return of -7.38% has been seen in the past year, the 5-year return of 23.58% highlights both the volatility and high growth potential of the small-cap sector. As the Indian economy moves forward, this index is expected to become an essential tool for both asset managers and passive investors.
Along with this, the historical trend chart suggests that while there were many ups and downs in the smallcap index from 2005 to 2025, the long-term trend has been strong. This indicates that India’s smallcap universe is maturing with time and good quality companies generate value in the long run.
Also, as the size of the Indian economy grows, the entry of new companies and sector-wise expansion in the smallcap space will increase. This index could become the main benchmark of the Indian smallcap market in the future.
*The companies mentioned in the article are for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
