Small, midcap indices decline up to 9% in 2025: Key factors behind sustained selling pressure

In just two trading sessions from January 21-22, the index declined by 5 percent. Key laggards included Aditya Birla Real Estate, Indiamart Intermesh, and Kaynes Technology, which fell up to 9 percent on Wednesday.

The Nifty Midcap 100 index has shed 7.7 percent this month. Persistent Systems, Prestige Estates, and Oberoi Realty were among the biggest losers from the midcap segment, dropping up to 8 percent.

Factors Fueling the Selloff

The recent correction in small and midcap indices, with a sharp 5 percent fall over two sessions, is largely driven by a mix of valuation concerns, macroeconomic pressures, and profit-booking by investors.

Sonam Srivastava- Founder and Fund Manager at Wright Research PMS said rising global uncertainty has amplified the selling pressure. Concerns over elevated crude oil prices, geopolitical tensions, and a potential slowdown in global demand have kept investor sentiment cautious.

"Domestically, the RBI's hawkish stance, citing inflationary risks, has added to market unease. Rising bond yields and tightening liquidity have also played a role, increasing the relative attractiveness of debt investments over equities," she noted.

After a strong rally throughout 2023, many small and midcap stocks reached valuations that were above historical averages. "This created a natural expectation of a correction, especially in the absence of fresh triggers to justify these elevated levels," Srivastava further said adding that profit-booking by retail and institutional investors, who benefited from the earlier rally, has further accelerated the decline. This was evident as the broader markets underperformed while large-cap indices remained relatively resilient.

Vivek Sharma, Investment Head at Estee Advisors noted one of the primary concerns for investors has been overvaluation. Mid-cap and small-cap stocks were trading significantly above their historical median valuations. The subsequent correction has had a cascading effect where the market fall validate investor concerns, which prompts further selling, leading to further fall in the market.

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Looking Ahead

With Nifty and Sensex hitting multi-month lows and broader indices underperforming, investors are advised to tread cautiously. Analysts recommend focusing on quality stocks with strong fundamentals, given the current market uncertainty.

"These corrections are often healthy in the long term, as they bring valuations to more sustainable levels, creating opportunities for long-term investors to re-enter quality stocks at reasonable prices. For small and midcap investors, the focus should remain on fundamentally strong companies with growth visibility, avoiding speculative plays during volatile phases," Sonam said.

"Corrections like these should be seen as opportunities to invest further. Data from AMFI indicates that retail investors are now viewing market corrections as entry points rather than a signal to run away. My recommendation to investors is to focus on the long-term potential of your investments and view corrections as opportunities for wealth creation," Sharma added.

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