Broader markets fell on February 28, with small cap and midcap indices plunging. The Nifty Smallcap 100 and the Midcap 100 indices were down around 2 percent each for the day.
The meltdown tilted the market breadth heavily in favour of losers. Nearly four stocks fell for each that rose. About 684 shares were up, 2,556 were down and 65 were unchanged.
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Vodafone Idea plunged 14 percent amid concerns that the company's Rs 45,000-crore fundraising plan may not be enough to rescue the telco.
Zee Entertainment Enterprises was the other major laggard, tumbling over 4 percent after the company set up a panel to examine the allegations against the firm, its promoters and key managerial personnel by regulatory bodies.
Among sectors, media, realty and PSU banks were the worst hit, having slumped over 2 percent each.
The sharp sell-off in the small and midcaps was expected, as valuations had turned frothy after the bull in 2023. The Nifty smallcap delivered 74 percent returns in the past year and the the midcap 100 index gained more than 60 percent.
The exuberance pushed valuations way above fundamentals in several segments, making analysts cautious on a further upside. The correction in the broader market is healthy and will pull some counters out of the overbought zone, analysts said.
Today's meltdown can also be attributed to capital markets regulator Securities and Exchange Board of India asking mutual funds to work towards protecting investor interest, especially in the context of the froth building up in the small cap and midcap schemes.
SEBI has asked mutual funds to limit fund flows into small cap and midcap stocks, and rebalance portfolios, among other measures. Asset managers are also reportedly asked to provide investors with more information on the risks associated with their small and mid-cap funds.
Not just that, mutual funds will now be asked to disclose their readiness to handle large redemptions, the potential impact on portfolio value from significant outflows, and the amount of cash and liquid assets available to meet such outflows.
On that account, several funds, including Kotak Mutual Fund, have also restricted inflows into their small-cap funds recently, due to a sharp rise in valuations amid unprecedented inflows.
Kotak's small-cap fund will limit monthly Systematic Investment Plan inflows to Rs 25,000 and lump-sum investments to Rs2 lakh starting March 4. Other major fund houses like SBI MF, Nippon MF, and Tata MF have also imposed limits on small-cap funds.
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