More pain for mid-caps may be in store. Here’s why

Deepak Jasani, head of research, HDFC Securities, attributed the tumble to a risk-off trade sentiment. "Mid-caps and small-caps rise very sharply and when they fall, they also fall sharply. So the current fall reflects some sort of risk aversion on the part of traders and investors," he said. This downward movement, he said, can be expected to continue for the next couple of days as people look to book profits as prices drop.

Also read: Nifty Midcap index hits 2-month low, smallcap stocks under pressure

From a broader viewpoint, Siddarth Bhamre, head of research, Religare Broking, said that if one were to look back at 2022, mid-caps didn't participate in the rally and were performing in line with large-caps. It was only in 2023 that mid-caps started outperforming. "By their very nature, and if you look at the historical performance, the beta of mid- and small-caps is higher than your broader indices. So we have seen a good amount of outperformance, but when the market is under pressure you will see a bout of underperformance as well, "he explained. Also, while they rise greatly when markets rise, they also fall much more when markets are going down. While this is not surprising, Bhamre said, market players tend to get more perturbed when they fall by 7 to 8 percent in a day, like they did on Monday, when many small- and mid-cap stocks fell as much as 10 percent.

"As long as these stocks were rising, investors were (sort of) holding back the selling. But now if the prices start to fall and don't recover, then more and more people will be enticed to be on the sell side," Jasani said.

Amit Khurana, head of equities at Dolat Capital, said that as a philosophy they have been wary of the segment due to overvaluation of some stocks. Monday’s selloff, according to Khurana, was not just a one-off and was related to various global factors as well as other negative news flows during the day. Another reason could be that it was the start of the expiry week. Monday's selling pressure, Khurana said, was very evident and while it is difficult to give a day-to-day view, from a very near term perspective, if global cues continue to be negative, this fall could also continue. But he added that some of these stocks are also coming to levels that make them a bit more attractive.

Also read: Large-caps offer value, current valuations attractive: Prashant Jain of 3P Investment

Bhamre added that for the sector as a whole, the need to be selective could not be overemphasised. He added that while mid-caps may show some more days or even weeks of underperformance, the rally that started in small- and mid-cap stocks was not done yet and there appeared to be no reversal in the journey. "It is a bout of profit booking and even if some of the mid-cap indices have not seen any major correction, leading to capitulation of portfolios, traders or investors who enter late might be feeling the heat but people who have invested in these names or this space in last one year are still sitting on very large profits. It's a correction in a bigger uptrend which is going on," he said, adding that India is still in a sweet spot, especially looking at the choices fund managers have globally from a medium to long-term perspective. "I believe we should not get scared because of this fall. It is the nature of mid-cap, small-cap stocks that they rise significantly and fall substantially," he said.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.