Mid- and small-cap stocks lost more ground on Tuesday as concerns that valuations have turned ‘frothy’ has prompted some investors to take risk off the table. The selling is partly the fallout of regulatory concerns of a bubble in the segment and a directive by the Association of Mutual Funds of India (Amfi) to mutual funds to conduct stress tests.
While the BSE SmallCap Index lost 2.11%, the BSE MidCap index gave up 1.31%. In the last two sessions, the small-cap gauge has dropped from 44,653 to 42,831, logging a fall of about 1,822 points or 4.08%. The mid-cap index has come off from 39,852 to 39,238, recording a drop of 614 points or 1.54% in two days.
More than half of the companies in the 946-member BSE Small Cap Index have fallen 20% from their recent highs.
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The BSE IPO index also fell by 2.9% on Tuesday, with all but one of the 69 constituents losing value. The gauge, which measures the performance of newly listed companies, has now lost 5.02% in the last two sessions and has given up about 10% since its February peak.
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Experts point to the relatively more steady benchmarks —Nifty and Sensex — saying money is moving to bigger stocks. On Tuesday, the Nifty closed 0.01% higher at 22,336; on Monday it had ended the session 0.72% down at 22,333.
Securities and Exchange Board of India chairperson Madhabi Puri Buch had on Monday expressed concerns there were pockets of froth in the small and mid-cap space.
“Some people call it a bubble,” Buch had observed, adding it may not be appropriate to allow that froth. The regulator has directed mutual funds to provide additional disclosures and moderate inflows into mid-and small cap schemes.
Encouraged by the stunning returns that small- and mid-cap stocks have given over the past year or so, retail investors have continued to bet on these companies. “They are betting on tips being circulated on WhatsApp and Telegram groups,” said a market watcher, adding there seems to be a fear of missing out.
Experts caution that small investors are falling into traps set by operators. “They are using the higher prices of stocks to borrow more and betting on these expensive stocks. This is a classic pattern,” said the head of a leading brokerage.
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Amfi has asked mutual funds to conduct stress tests once in a fortnight and disclose the outcomes from March 15. The exercise would help assess the time taken to exit the position in a weak market.
Meanwhile, following the markets regulator’s concerns of manipulation in SME stocks, the BSE SME IPO Index fell 4.67% on Tuesday, while it had fallen 5.71% intra-day. It has fallen 7.79% in the past two sessions.
