Small & midcaps pain likely to continue amid red flags from SEBI, valuation concerns

New Delhi: Pain is likely to continue in the broader market amid stretched valuation and red flags from SEBI, Siddhartha Khemka, Head of Retail Research at Motilal Oswal Financial Services, said on Tuesday.

Also, the mandatory disclosure format for mutual funds shared by SEBI to look at the stress situation in the funds will be out by March 15. This is also adding to the ongoing concerns. Thus, volatility in the midcap and smallcap segments could keep the benchmark indices in check, Khemka said.

The Nifty swung between gains and losses to finally close the volatile day flat at 22,336 levels on Tuesday. Selling pressure was seen in the broader market with the Nifty Midcap 100 down 2.1 per cent while the Nifty Smallcap 100 shredded 5 pert cent in the last five days, he added.

The advance-decline ratio continued to remain weak with only 324 gainers against 1,929 losers on the NSE. The majority of the sectors ended in red, as profit booking was seen in realty and PSU bank stocks.

On small and midcap stocks' outlook, Gaurang Shah, Senior Vice President, Geojit Financial Services, said that excessive liquidity drove up midcap and smallcap stock prices, often exceeding their justified values based on earnings. The surge in funds flowing into these segments compelled fund managers to invest, further inflating valuations.

“Authorities have acknowledged the situation and proposed potential regulations. Given the historical volatility of small and midcap stocks, the investors must exercise caution in allocating funds, whether directly in stocks or through mutual fund SIPs," Shah said.

Investors should be prepared for the inherent volatility in small, mid, and microcap stocks, as corrective phases have occurred before. Regulatory steps aim to safeguard the interests of small retail investors, he added.