Smallcap and Midcap Indices Plunge Over 3%, Wiping Out ₹18 Lakh Crore

The Nifty Midcap 100 and Nifty Smallcap 100 extended their losing streak for the fourth straight session on Friday, February 28, registering an early trade decline of over 2 percent. The broader market sell-off persisted as geopolitical concerns weighed on investor sentiment.

From its peak, the Nifty Smallcap 100 has plunged more than 25 percent, wiping out approximately ₹5.25 lakh crore in market capitalization. Similarly, the Nifty Midcap 100 has tumbled over 21 percent from its high, erasing ₹13.35 lakh crore in value.

Meanwhile, the Nifty 50 index has dropped over 14 percent since its mid-September peak, marking a continuous five-month decline—the longest losing streak in nearly three decades. This downturn has resulted in a wealth erosion of ₹31.94 lakh crore, while the broader markets have collectively lost ₹18.60 lakh crore.

As trading commenced on February 28, the Nifty 50 was already in the red, poised for a seventh consecutive session of losses. By 11:30 AM, the index had declined 1.19 percent to hover around 22,250.

On the valuation front, the ongoing correction is bringing the Nifty 50’s one-year forward P/E ratio below its 10-year mean level of 20x, edging closer to -1SD.

Market experts have been cautioning investors about potential overvaluation in the small and mid-cap segments. ICICI Prudential’s veteran CIO, S. Naren, is among those who have warned of the risks associated with the prevailing market euphoria.

These concerns date back to roughly a year ago when SEBI Chairperson Madhabi Buch urged mutual fund houses to implement checks and balances to prevent a potential "bubble." Likewise, industry veterans such as Prashant Jain and Sanjeev Prasad of Kotak Institutional Securities have been voicing apprehensions since late 2023, with their warnings becoming more pronounced amid the continued retail-driven rally in these segments.

Prashant Jain, CIO at 3P Investment Managers, noted that the recent underperformance of mid and small-cap stocks was unsurprising, as valuations left little room for further multiple expansions. Similarly, Kotak Institutional Equities’ Sanjeev Prasad previously criticized the "mid-cap madness" fueled by excessive inflows into the broader market.

Helios Capital’s Founder and Fund Manager, Sameer Arora, highlighted in a prior interview that while mid and small-cap stocks have outperformed by 6-8 percent per annum over the past two to three years, market corrections tend to happen much faster than investors anticipate. Arora also pointed out that despite the historically low returns in the Nifty over the past three years—except for the NSE 500, which has fared better—long-term returns (spanning around seven years) remain within the usual range, with the Nifty delivering 13-14 percent and the Nifty 500 yielding 15-16 percent.

Adding to investor concerns, foreign institutional investors (FIIs) have been offloading their holdings amid global uncertainties. Rising U.S. Treasury yields and expectations of prolonged higher interest rates have led to capital outflows from emerging markets like India. Domestic institutional investors (DIIs), however, have continued to absorb some of the selling pressure, yet market sentiment remains weak.

Analysts suggest that the sharp corrections may create buying opportunities for long-term investors, particularly in fundamentally strong mid and small-cap stocks. However, caution is advised, as volatility is likely to persist in the near term. Investors are being urged to focus on earnings growth, balance sheet strength, and sector-specific resilience when making investment decisions.

Despite the current downturn, historical trends indicate that market cycles eventually recover. Experts recommend staggered investments rather than lump-sum allocations to mitigate risks associated with unpredictable short-term fluctuations. As valuations adjust, investors with a disciplined approach could find attractive entry points in select stocks with robust growth potential.