In 2023, the Nifty small-cap 100 and mid-cap 100 indexes have outpaced the benchmark Nifty 50, with gains of 58% and 54%, respectively. In February 2024, the assets managed in small-cap and mid-cap schemes surged to Rs 2.49 lakh crore and Rs 2.94 lakh crore, respectively, driving a rally in small and mid-cap stocks
But, in the first half of March 2024, the Indian stock market witnessed significant fluctuations, particularly in small-cap and mid-cap stocks. Due to overly speculative concerns in the equity market, which led to a sharp correction and selloff in small-cap and mid-cap stocks,.
The S&P BSE Small Cap Index lost over $40 billion in market value in the last two weeks, which resulted in the S&P BSE Small Cap Index falling by 11% from its peak earlier this year.
● Based on such momentum in the market, the Securities and Exchange Board of India (SEBI) expressed concerns regarding the overheating and possible bubbles in small-cap and mid-cap stocks, attributed to high valuations not substantiated by fundamentals. This cautious approach from regulators led to a widespread market downturn in early March 2024, signaling a correction.
● Sebi and AMFI instructed small and mid-cap mutual funds to reveal fund stress test findings from March 15, 2024, to gauge their resilience amid market volatility and sudden redemption pressures. Additionally, there are concerns regarding potential manipulation in the SME sector.
● One of the largest fund houses, ICICI Prudential Asset Management Company, temporarily suspended lump-sum deposits in its mid and small-cap funds effective March 14. Similarly, last month, Kotak Asset Management restricted flows on recurring plans in its small-cap fund due to the significant ramp in this segment, due to “valuation distortions.”.
● The S&P BSE Smallcap Index and the S&P BSE Midcap Index, trading at P/E valuations of 29.2 and 25.8, respectively, are deemed overvalued, whereas the S&P BSE Sensex, with a lower P/E ratio of 24.9, and the Nifty 50 Index, trading at 22.7, are both valued lower compared to the small and Midcap indices.
At the same time, during this period, mutual fund advisors recommended investors invest in the large-cap category for the upcoming year. The advisors believe that the large-cap category may do well as the market is entering expensive territory. As per reports.
Meanwhile, large-cap stocks are typically considered stable investments due to their established market positions and lower volatility compared to smaller companies. They are often mature companies with moderate growth prospects and can provide steady returns over time.
Investing in large-cap stocks offers reduced volatility, robust competitive advantage, strong cash flow, and other benefits. Consequently, they are typically viewed as safer investments due to their established market presence and lower risk compared to smaller companies.
The market experienced fluctuations, particularly in small-cap and mid-cap stocks, which saw a sharp correction and selloff.
Written by Omkar Chitnis
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