The broader markets swam in a sea of red, as investors rushed to offload their holdings in smallcap and midcap stocks. The dismal sentiment in the benchmarks carried over to the Nifty Midcap 100 and Nifty Smallcap 100, that plunged over four percent in trade today.
Experts had been sounding the alarm on stretched valuations in the midcap and smallcap spaces over the past few months, but retail investors refused to pay any heed. With the buildup of froth in the market, it was a matter of 'when' the correction would take place, not 'if'.
From their respective lifetime highs, the Nifty Midcap 100 index has fallen 18.9 percent, while its smallcap peer has entered into the bear market, cracking 22 percent. Combined, the erosion in value has been around Rs 16.8 lakh crore, leaving investors' portfolios bleeding.
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The selling pressure in the markets further intensified as US President Donald Trump announced reciprocal tariffs on India, as a result of the high tariff differential between the two countries.
The recent selloff in mid- and small-cap stocks follows cautious remarks by ICICI Pru AMC's CIO S Naren at a distributor conference. He warned investors against SIPs in mid and small-cap funds due to market volatility, sparking a debate in the industry. He was speaking at an IFA Galaxy event.
Amish Shah, Head of India Research at Bank of America Securities remains particularly wary of the broader market, arguing that mid and small-cap stocks are still overvalued despite recent corrections. He predicts the possibility of further correction in this segment of the market, with returns potentially lower or negative compared to large-cap counterparts.
The selloff in this market segment has especially intensified in the past two months, with both the small as well as midcap indices slipping into the bear territory with their 20 percent crash from record highs.
Several market experts have pointed the blame for expectations of muted returns on India's valuation problems. "India is currently in a cyclical downcycle or growth moderation phase. This makes it difficult to justify valuations above long-term averages, even after recent market corrections," Shah said in an exclusive interaction with CNBC-TV18.
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