Small And Mid-Cap Indices Wipe Out Over Rs 6 Lakh Crore. Here's What Analysts Say

The broader markets have plunged and underperformed the benchmark indices on Wednesday, but analysts maintain that it is a short-term correction and it still has a hope for long-term positive outlook.

The small-cap and mid-cap indices closed lower on the BSE, eroding Rs 6.88 lakh crore in market cap in a day. The indices have been falling for a third consecutive session.

The S&P BSE SmallCap ended 5.1% down at 40,565.96, the lowest since Nov. 30. The BSE MidCap closed 4.2% lower at 37,591.15, the lowest since Jan. 23. 

The Nifty Midcap 150 closed 4.17% lower and the Nifty Smallcap 250 ended 5.18% lower, their biggest fall in two years.

The starting point of concern that many leaders in industry pointed to was that there were excess gains in broader markets, which needed to be corrected, according to Atul Suri, chief executive officer of Marathon Trends Advisory Pvt.

On the frothiness in small cap, mini cap and mid cap, there is an example of a public sector bank that is a very good one, but trades at double the valuation of most private sector banks, according to Nilesh Shah, managing director of Kotak Mutual Fund.

There' is not much difference in fundamentals between them, except that 96.4% is owned by the government, which does not trade in the market. In the remaining 3.6%, some portion is owned by a large insurance company which doesn't sell the stake normally, Shah said.

Hence, effectively, floating stock owned by such a small number of traders, a small movement can push up the prices higher. This momentum brings more money, which ignites traders' sympathy for other PSU banks, subsequently creating a flow. This causes a froth, he explained.

Suri said there had been a lot of high-net-worth individuals and retail investors' money in mid cap and more so in small-cap spaces, where they have been enjoying very high returns.

When markets fall in such spaces, it leads to liquidation. "What you see on the screen is exit happening at any price. This kind of selling happens when leverage is getting unbound," he said.

"In small caps, it takes three–five days to wipe out three–five months returns.... That's the nature of the game," Gurmeet Chadha, chief investment officer at Complete Circle, said on X.