Avoid investing in midcaps, smallcaps

Avoid investing in midcaps, smallcaps

Investors should exercise caution when investing in momentum or small-cap stocks that have stayed overheated over the past two years.

Despite previous great performance, market professionals advise against investing in mid and small-cap firms. The Nifty Midcap and Smallcap indices have risen year on year in 2024, but caution is advised due to the chance of a selloff. Market analysts now advise investors to avoid mid and small-cap stocks, despite their earlier great performance under the Modi government and persistent outperformance compared to benchmarks over the past year, as well as the previous three and five years. This advice follows a shift in market sentiment, indicating concerns about their future performance. The 2024 general election result stunned the markets because the BJP's seat total fell below expectations. Exit polls influenced market positions, indicating a strong majority for the BJP and NDA.

While the benchmark Nifty gained 4.6% in 2024, the Nifty Midcap and Nifty Smallcap indices increased by 13% and 11%, respectively. Over the last year, the mid-cap index has risen 53.5 percent, while the small-cap index has risen 61 percent, compared to the benchmark Nifty's 22 percent increase. However, over the last month, the mid-cap index exceeded the benchmark, while the small-cap index lagged. In the last month, the Nifty increased by 1.2 percent, while the mid-cap index increased by 3 percent and the small-cap index increased by only 0.5 percent. "In the current market climate, investors should be wary of investing in momentum companies or small-cap firms that have stayed overheated over the past two years. Any extended stretch of sideways or downward movement in momentum stocks might result in a sell-off. Investors should, therefore, understand the risk associated before making such investments," stated Vaibhav Porwal, Co-Founder of Dezerv.

However, he stated that a sharp drop in the market without any structural change in the fundamentals should be viewed as an opportunity. "We believe that the investors should capitalize on this opportunity for fresh investments in equity."Meanwhile, Bernstein retains an 'underweight' rating on small and mid-cap equities in comparison to large-caps. They believe the current market sell-off was slightly overdone in the short term, leaving room for a little rebound, with capex-linked equities likely to lead the way. Similarly, in terms of market strategy, JM Financial continues to favor largecap stocks over small and midcap stocks because of the value comfort.

Furthermore, Axis Securities highlighted an increase in the broader market's return on equity (ROE) following several years of underperformance. Despite the recent excellent performance of midcaps and smallcaps, it feels the margin of safety in terms of valuations for these segments has shrunk when compared to largecaps. As a result, it forecasts potential time corrections in certain market segments in the near future, with flows shifting towards largecaps. Meanwhile, Trivesh D, COO of Tradejini, recommended that "Rather of distinguishing between large caps, midcaps, and small caps, I recommend focusing on the basics and completing extensive study. It makes no difference whether you invest in a large, mid, or small-cap company—staying bottom-up and seeing long-term potential is critical. You should emphasize capital-efficient enterprises that can take advantage of favorable market conditions. As long as these requirements are followed, your assets will likely exceed the market." also Prior to making any investing decisions, we recommend that investors consult with recognized specialists.