The small- and mid-cap segment is witnessing a downturn in sentiment, with a significant portion of stocks slipping into the red. Over 80 percent of stocks in the BSE Small-cap index have registered negative returns since February 19, coinciding with the index’s downward trend. In contrast, the Nifty has seen a marginal uptick of nearly one percent during the same period.
The unease surrounding small-cap stocks stems from various factors dampening liquidity in the segment. Rampant operator activity, which propelled fundamentally weak stocks to artificial highs, is now facing scrutiny following the Enforcement Directorate’s raid on Dubai-based hawala operator Hari Shankar Tibrewal and 13 other entities allegedly involved in manipulating stock prices. This development has prompted caution among market participants, according to brokers.
Additionally, small-cap stocks are experiencing jitters due to SEBI’s advisory urging mutual funds to safeguard investor interests amidst mounting concerns about overheating in small-cap and mid-cap schemes, further exacerbating market apprehensions.
SEBI’s recent move to request additional disclosure regarding the liquidity of mutual fund portfolios has sparked concerns among market participants. While the regulatory body has ruled out immediate mandates such as halting flows or selling down stakes, there is speculation about potential portfolio adjustments by fund managers. With regulatory scrutiny on portfolios increasing and liquidity becoming a top priority, there is uncertainty over whether fund managers will opt to divest stakes in less liquid stocks.
In response to the recent correction in the market, fund managers have expressed appreciation for the adjustment. Ruchit Mehta, Head of Research at SBI Mutual Fund, welcomed the correction, stating that it was necessary to address the surge in undesired stock prices. He emphasized the importance of this correction to realign valuations with fundamentals.
According to several fund managers, the small- and mid-cap segments had become overvalued, leading to frothiness in the sector. This sentiment was echoed by Sneha Poddar, an analyst at Motilal Oswal, who suggested shifting focus to large-cap stocks in the near term. Poddar advised investors to utilize the correction as an opportunity to accumulate quality stocks for the long term, as valuations had become excessively high after a significant uptrend.
Meanwhile, the Association of Mutual Funds in India (AMFI) announced plans to introduce a mandatory disclosure format for mutual funds, focusing on stress testing, to be released by March 15. The disclosure aims to evaluate how quickly mutual fund schemes can liquidate their portfolios during stress or redemption pressures. This move follows SEBI’s instructions and is intended to inform investors about potential outcomes in small-cap and mid-cap funds during stressed situations.
Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, emphasized the importance of focusing on individual stocks and understanding the risks associated with investing in mid- and small-cap segments. Bathini highlighted the high-beta nature of these stocks and urged investors to recognize the volatility inherent in this space.
In terms of mutual fund inflows, mid-cap schemes received Rs 3,869 crore while small-cap schemes attracted Rs 6,180 crore in 2024 so far. In 2023, mid-cap funds attracted nearly Rs 23,000 crore, and small-cap funds saw inflows of over Rs 41,000 crore. This surge in inflows reflects the growing interest in these segments among investors.
However, Gaurang Shah, Senior Vice-President at Geojit Financial Services, cautioned against excessive liquidity driving up mid-cap and small-cap stock prices beyond their justified values based on earnings. Shah highlighted the need for investors to exercise caution and be prepared for volatility, especially in small, mid, and microcap stocks.
With the BSE MidCap index currently trading at a one-year forward price-earnings ratio of 25.6x and the BSE Smallcap index at 23.16x, compared to their respective 10-year average PEs, market observers are closely monitoring regulatory actions aimed at addressing overvaluation concerns in the small and midcap segments.
Disclaimer: The opinions and investment insights provided are intended solely for informational purposes and should not be construed as financial advice. Bystox.in strongly advises users to consult certified financial experts or professionals before making any investment decisions. We emphasize the importance of conducting thorough research and seeking personalized guidance tailored to individual financial goals and circumstances. Please be aware that investing involves inherent risks, and past performance is not indicative of future results. Bystox.in does not assume any responsibility or liability for the accuracy, completeness, or reliability of the information provided. Users are encouraged to exercise caution and diligence in their investment endeavors. Remember, your financial well-being is paramount, and seeking expert advice is highly recommended.