Analysts advise caution as small and midcap stocks sparkle

The Nifty Smallcap 100 index has surged 40.53% while the Nifty Midcap 100 has risen 35% from 20 March through 5 September. In the same per-iod, the Nifty has delivered a relatively modest 15%, prom-pting market veterans like Deven Choksey and Shankar Sharma to sound a note of caution to retail investors amid the stellar rally in smallcaps.

While HNIs have a penchant for investing in small and midcaps, domestic mutual funds have also pumped money into small cap and mid cap schemes at the cost of large caps, apart from investments by direct retail. For example, mutual funds have net invested a total of ₹15,108 crore in small cap fund schemes and ₹6,358 crore in midcap schemes over April-July. Large cap schemes have seen a net outflow of ₹5,239 crore in the same period.

While data for August is awaited, inflows are expected to be strong which has culminated in the Nifty Midcap 100 breaching the 40000-mark (40292.15) for the first time on 5 September while Nifty Smallcap 100 made a record high of 12701.05 before both closed marginally lower.

The stocks which have driven the rally in the small cap 100 from 20 March to 5 September are Suzlon (205% return), Mazagon Dock Shipbuilders (191%), BSE (175%), RVNL (143%) and FACT (157%). The midcap 100 drivers have been IRFC (171%), REC (107%), BHEL (86%), Polycab (85%) and IDFC First Bank (83%), according to market data analytics web.strike.money, developed by IndiaCharts.

Small cap proponent Shankar Sharma, founder GQuant Investech, said, “I have been a small cap proponent for the past two years and this has played out very well. I continue to remain optimistic as India’s GDP growth rate is likely to remain in the 5-6% range which is enough for small caps to grow their revenues but isn’t a strong enough tailwind for large caps which require a sustained 8%.”

“That said, small caps can reverse direction without warning so if you’ve raked in decent gains, it’s good to keep taking some money off the table,” Sharma added.

Deven Choksey , managing director of KRChoksey Shares and Securities Pvt. Ltd, said retail always tended to get trapped in small and midcaps and should thus remain cautious, given the liquidity driven rally.

“Even though retail has begun using the MF route in addition to investing directly into these stocks, it’s prudent to remember that this rally has been driven by liquidity rather than fundamental factors . MFs have turned to small and midcaps as beating the benchmark large cap indices isn’t possible because the costs of managing the funds makes competing with passive trackers well-nigh impossible. But it’s possible to do that with the mid and small caps.”

Updated: 05 Sep 2023, 10:08 PM IST