Small-Cap Stocks Witness Sharp Decline, Mutual Funds Take Cautious Measures

The Nifty Smallcap 100 index saw a significant decline of 5.3% in today’s trading session, falling below the 15,000 mark to close at 14,295 points. This marked the most substantial intraday drop experienced this year.

Among the 100 stocks in the index, 98 stocks ended the day in the red. Stocks such as Rites, HUDCO, Data Patterns, Tata Steel, BHEL, Nalco, Jyothy Labs, Century Textiles & Industries, L&T Finance Holdings, HFCL, KEI Industries, MRPL, SpiceJet, and Global Health were among those recording losses ranging between 5.5% to 11%.

The sharp downward trend in small-cap stocks was triggered by concerns raised by market regulator Securities and Exchange Board of India (Sebi) regarding overvaluation in the mid-cap and small-cap segments. This led to the Association of Mutual Funds in India (AMFI) directing mutual funds to conduct stress tests every 15 days, with the first test results expected by March 15.

In response to Sebi’s warnings and the stress test mandate, mutual fund houses like ICICI Prudential Mutual Fund announced they would no longer accept lump-sum investments in mid-cap and small-cap funds starting March 14. This cautious approach follows similar initiatives by Nippon India, Tata, and SBI Mutual Funds, which paused lump-sum investments in their small-cap schemes.

Moreover, ICICI Prudential Mutual Fund has suspended switches into both its mid-cap and small-cap funds while continuing to accept new registrations through systematic investment plans (SIPs) and systematic transfer plans (STPs) but with a cap of ₹2 lakh per PAN level.

Retail investors heavily invested in small and mid-cap stocks to take advantage of the rally are now facing the brunt of the market correction, as many stocks in the Nifty Smallcap 100 index are trading at significant discounts from their 52-week highs, ranging from 10% to 45%.

Gaurang Shah, Senior Vice President at Geojit Financial Services, emphasized the importance of caution when investing in small, mid, and microcap stocks. He highlighted the need for investors to be prepared for the volatility in these segments, especially in light of regulatory steps being taken to protect the interests of retail investors.