Sensex, Nifty drop over 1%; small- and mid-caps hit hard

Indian benchmark indices, Sensex and Nifty, dropped by over 1% on Wednesday due to broad-based selling pressure at near record high levels. Small- and mid-caps also experienced their worst session in over a month, ahead of the results of a stress test for mutual funds. At close,, the blue-chip NSE Nifty 50 index fell by 1.51% to 21,997.70, while the BSE Sensex declined by 1.23% to 72,761.89.

A total of 3,976 stocks were actively traded on Wednesday, with 405 advancing, 3,510 declining, and 61 remaining unchanged. Among these, 97 stocks hit a 52-week high, while 253 stocks hit a 52-week low. There were 1,094 stocks in the lower circuit and 118 in the upper circuit. All sectoral indices closed in the red except for Nifty FMCG, which saw a marginal increase of 0.05%. Nifty metals recorded the highest losses, followed by media, realty, and oil & gas sectors. The Nifty mid-cap 100 index declined by 4.40%, while the small-cap 100 index fell by 5.28%.

Gaurang Shah, Senior Vice President, Geojit Financial Services, said, “Excessive liquidity drove up mid-cap and small-cap 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 mid-cap 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 micro-cap stocks, as corrective phases have occurred before. Regulatory steps aim to safeguard the interests of small retail investors.”

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, further added, “It is important to understand that over 1,000 stocks are in the lower circuit, indicating that there is more pain to come in this segment. Actions from mutual funds also indicate the excessive valuations in the broader market. ICICI Pru has joined two other leading funds in stopping lumpsum investments in their mid- and small-cap schemes. More are likely to follow. The net impact of this shift would be more money flowing into large-caps. Outperformance is likely to continue.”

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