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NEW DELHI : Mid-caps and small caps continued to outperform benchmark indices despite the recent volatility in the markets. The gains of 5.64% and 5.89%, respectively, for BSE mid-cap and small-cap indices are higher than the Sensex’s 3.42% rise in August. The trend continued in September. The Sensex has gained just 1.74% so far in September, while mid- and small-cap indices gained 3.32-4.34%.

The rebounding equity markets improved sentiments and the risk appetite of investors. Falling commodity and crude prices and better growth prospects of the Indian economy are some of the factors that supported investor confidence. Positive foreign institutional investor (FII) flows also remain supportive for the mid-cap and small-cap rally.

Stromg rebound
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Stromg rebound

Though mid-caps and small caps have high beta and higher risks, higher rewards are also associated with the asset class and investors are willing to take more risks, said experts.

The rebound in mid- and small caps was also aided by a catchup rally after a significant underperformance. Furthermore, earlier, FIIs were selling large caps and domestic investors were buying large caps. Now FII selling is done. With liquidity very low in mid- and small caps any buying leads to a run up in mid- and small caps, said Nitish Master, portfolio manager at Axis Securities Ltd.

Mitul Shah, head of research at Reliance Securities concurred. Nifty Midcaps index has outperformed with 24% return since mid-June, while the Nifty delivered 16% return, Shah said. Historically mid and small caps and high beta stocks outperform when the Nifty rises. Further, lower commodity and oil prices supported mid-cap stocks, which have fallen more during the downturn. Outperformance of mid- and small-cap stocks will continue with a strong economic rebound, normal commodity prices, inflation within targeted range, and better visibility expected in 2HFY23, Shah said.

Master said the asset class should do well as long as domestic money is positive along with FIIs. “As long as crude is stable and FIIs pour in money we will not have issue if small- and mid-cap move up," Master said.

“If India is going to do well, if we are to see a 7% gross domestic product growth this year, everything from large caps to mid-caps to small caps is likely to do well," said Manish Jain, fund manager, Coffee Can PMS at Ambit Asset Management.

Experts warned that investors should pick quality mid-caps, which fell more from their peaks, besides considering the management quality and low debt levels as high interest rates will continue for long. “We recommend investors to invest in companies that generate free cash flow and have a good business model," said Master. Now, we are seeing a buying frenzy in companies not having the right road map for cash flow generation, or where promoter quality is edgy, he said.


Ujjval Jauhari

Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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