Nifty Smallcap 100 index slides 5.3%, 98 stocks close in the red

The sell-off in small-cap stocks continued for the third straight day on Wednesday, experiencing the most intense pain this year so far. In today's intraday trade, the Nifty smallcap 100 index took a sharp dive of 5.3%, slipping below the 15,000 mark to finish the trade at 14,295 points. This marked the most significant intraday decline witnessed so far this year.

Also Read: Is AMFI guideline on mutual funds' froth build-up responsible for small-cap, mid-cap crash?

98 out of the 100 stocks in the index finished the session in red, with some stocks such as Rites, HUDCO, Data Patterns, NMDC Steel, IRB Infrastructure Developers, Cochin Shipyard, SJVN, Nalco, the Central Bank of India, Indian Overseas Bank, Jyothy Labs, Century Textiles & Industries, NLC India, HFCL, KEI Industries, MRPL, UCO Bank, Global Health, and Angel One trading with losses between 5.5% and 11%. 

The downward trend in small-cap stocks was triggered by concerns raised by market regulator SEBI regarding the froth building up in small-cap and mid-cap segments. This prompted the Association of Mutual Funds in India (AMFI) to instruct mutual funds to conduct stress tests once every 15 days, the first of which should be published by March 15. 

Also Read: Sebi chief flags risk of bubble in stock market

This move aims to provide investors with valuable insights into the time required for funds to liquidate their underlying portfolios during adverse market conditions. Although mutual funds boast instant liquidity, these tests would determine how many days MFs would need to liquidate investors' portfolios if prices fell and volumes jumped. 

In light of this, ICICI Prudential Mutual Fund said in a notice that it will no longer accept lump-sum deposits in its mid- and small-cap plans beginning March 14. With this, ICICI becomes the first fund company to stop lump-sum deposits in a mid-cap fund. Earlier, Nippon, Tata, and SBI MFs had stopped lump-sum investments in their small-cap schemes.

Furthermore, it has stopped switching into both its mid-cap and small-cap funds but will continue to accept new registrations via systematic investment plans (SIPs) and systematic transfer plans (STPs). Each plan would have a monthly cap of ₹2 lakh per PAN level, as stated.

Also Read: Nifty Smallcap 100 index tumbles another 2.5%, down over 6% in March so far; here's why

Meanwhile, retail investors who have built up their portfolios by investing in small and mid-cap stocks to take advantage of the rally, regardless of valuations, are bearing the brunt of the pain, as the majority of stocks in the Nifty Smallcap 100 index are trading at discounts ranging from 10% to 45% from their 52-week highs.

Gaurang Shah, Senior Vice President, Geojit Financial Services, said, "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, it's crucial for investors to exercise caution in allocating funds, whether directly in stocks or through mutual fund SIPs."

"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 further added. 

Disclaimer: We advise investors to check with certified experts before making any investment decisions.