The Indian stock market recently witnessed a sharp correction, particularly in the Small and Mid-cap segment or SMIDs as they are popularly called.
Investors who have been riding high on the robust gains in these segments are caught off guard as prices plummeted.
This market crash is due to a mix of domestic and global factors at play and against the backdrop of foreign investors dumping Indian equities, particularly SMIDs.
Historically known for their high growth potential but equally high volatility, the mid and small-cap segments have borne the brunt of the sell-off the most, prompting fears of a prolonged downturn. The BSE Small Cap Index and the BSE Mid Cap Index have corrected 18.3% and 17.9%, respectively (as of February 12, 2025).
Table: Notable Decline in Mid and Small-Cap Stocks from their All-Time Highs
At the recently held 15th IFA Galaxy event, the CIO of ICICI Prudential Mutual Fund, S. Naren, highlighted investors need to be cautious about investing in SMIDs now, citing valuation concerns.
Graph 1: Cumulative Net Inflows Across Large, Mid, and Small Cap Funds
S. Naren cited this considering that Small Cap and Mid Cap Funds have witnessed sustained inflows in the past couple of years, particularly after the COVID-19 pandemic. Investors, retail and HNIs in particular, based on their past experience are showing their love for SMIDS but are perhaps oblivious to the fact that past performance may not necessarily be sustained in the future.
The rapid reversal in market dynamics has raised questions about the sustainability of past performance of SMIDs. There is a growing preference for stability with uncertainty looming and foreign investors are supposedly reallocating to large caps and mega caps.
Graph 2: SMIDS Cracking Under Pressure
From the graph, it’s clear, the Nifty Midcap 150 and Nifty Small cap 250 indices have plummeted from their peak levels. Meanwhile, the Nifty Large Cap index is also feeling the heat, but the relative decline is much less over the same period.
Investors are grappling with heightened volatility, leading to a wave of panic selling and a sudden erosion of portfolio values. Some of the key reasons behind the selling are:
- Amid global uncertainties,
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