PLAYING THE LONG GAME

Small and mid-cap surge in India raises regulatory concerns, but long-term investors with risk strategies may benefit from these volatile stocks given positive economic and interest rate forecasts

In recent weeks, small and mid-capitalization stocks have been underperforming the benchmark equity indices on the bourses.

This correction follows a warning from the market regulator, the Securities and Exchange Board of India (SEBI), about a potential bubble in several low capitalization stocks.

MARKET SITUATION

Raising similar concerns, the mutual fund body, the Association of Mutual Funds of India (AMFI), has written to Asset Management Companies (AMCs) flagging the issue of high valuations in the broader market.

AMFI's recommendations are two-fold: first, it has urged fund houses to conduct periodic stress tests to gauge any potential strain on the system due to heavy redemption pressure, if any.

Second, the association has advised AMCs to moderate inflows to the broader markets and rebalance the portfolios of their small and mid-cap schemes towards large-cap companies.

Taking a cue from the regulators, the mutual fund industry has responded by halting lump sum investments and investments through systematic investment plans (SIPs) in certain small and mid-cap schemes. They have also been booking profits in the broader markets and rebalancing their portfolios by increasing investments in large-capitalization companies.

This comes after a stellar run for small and mid-cap companies on the bourses in the last one year. Till 17th April '24, the benchmark Nifty 50 index had risen 25.08% year-on-year, while the 50-share Nifty and the 100-share NSE mid-cap indices soared by a much higher 58.24% and 74.34%, respectively. This significant outperformance far exceeds the historical averages, with the 5-year average returns for these mid-cap indices hovering around of 6% and 10%, and the 10-year average around 6% and 7%.