Rathi added that as liquidity tightens and investor caution grows, further corrections in these stock categories, particularly smallcaps, are likely. “If you currently hold shares in a company that is underperforming or showing lower-than-anticipated earnings growth, I believe it may be time to exit those positions. Historically, we have seen corrections of 50-55% in years like 2018, 2019, and 2020, and we could experience a similar situation now,” he stated.
Vivek Sharma, VP & Investments Head at Estee Advisors, emphasized that smallcaps are inherently risky and should be approached with caution. He noted that while the Nifty Smallcap 100 has delivered a 14.34% CAGR since its inception—a respectable return by any measure—these gains have been highly uneven.
“For example, from 2004 to its peak in 2008, the index surged nearly sixfold, reaching the 6,000 level. However, it took until the end of 2020—more than a decade—for the index to surpass this level again and continue its ascent towards 20,000 before the recent correction brought it down to 16,000,” Sharma explained.
The concerns over inflated valuations in small- and midcap stocks were recently echoed by S Naren, veteran fund manager and CIO of ICICI Prudential AMC. He warned investors about absurd valuations and advised them to exit small- and mid-cap stocks entirely.