Smallcap stocks have taken the biggest hit amid the ongoing correction in the Indian equity market. The BSE smallcap index is down 9% in a week followed by the Nifty midcap index falling 8.69% during the period. In fact, the Nifty smallcap index is trading lower for the seventh straight session. Subdued Q3 earnings, Trump tariffs and FII outflows have turned sentiment negative in the Indian equity market. Highly volatile, risky and high rewarding smallcap stocks have tumbled the most compared to largecaps and midcaps stocks in the current downward cycle of the stock market.
Coming to midcaps, the BSE midcap index plunged 7.71% in a week, signaling weakness in comparatively safer bets than the small caps. Nifty midcap index is also down 7.45% during the last one week. Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said, "The ongoing divergence in the market’s preference in favour of largecaps over mid and small caps will continue. Some of the top holdings in small cap mutual funds now are mega caps."
Largecap stocks considered as the safest bets with not so attractive returns compared to the smallcaps and largecaps have taken a much smaller hit in the ongoing correction.
The BSE largecap index has lost 3.57% in a week.
Midcap and smallcaps stocks are extremely overvalued, said Sankaran Naren, CIO of ICICI Prudential Mutual Fund.
Recently, Naren cautioned investors against mid-cap and small-cap SIPs. Naren said the median P/E ratio for mid-and small-cap stocks has soared to 43x, a level he considers 'absurd' and unsustainable.
The comparison in retursn and valuations could leave investors guessing whether they should switch to largecaps or midcap stocks from smallcaps.
Shridatta Bhandwaldar, Head - Equities at Canara Robeco Mutual Fund said, "Large-cap valuations have corrected to fair levels, trading at around 18.5x FY27 earnings, while mid-and small-caps remain 15-20% above historical averages. We believe the broader market may see a time correction over the next few quarters. Given the current market dynamics, we have moderated our cautious stance. For investors with a one-to-two-year horizon, large caps offer fair valuations, while mid- and small-caps require a longer-term view."
Abhishek Jaiswal, Fund Manager at Finavenue said, "The latest quarterly data reaffirms that small-cap stocks have not only outperformed large caps in market momentum but also on fundamental metrics. However, small caps tend to move sharply in both directions, making valuation and liquidity key considerations for investors. A well-balanced portfolio with a strategic allocation to both large and small caps ensures sustainable, less volatile returns. To navigate this dynamic space, investors must closely track government policies, company earnings calls, quarterly results, and major global economic developments. These factors shape market trends and provide crucial insights. Ultimately, the foundation of wealth creation lies in disciplined entry valuations and a well-defined investment horizon.”