Too little, exclaims Kotak Equities after multi-billion dollar smallcap crash

While the downside seen in high-flying small and midcaps looks big on the immediate scale, it is quite small in the context of the large returns of the past year. Nifty Midcap100 and Nifty Smallcap100 are down 5% and 10% in the past one month but they are still up 53% and 58%, respectively, in the past one year.

"We find the valuations of the majority of the midcap and smallcap stocks to be quite expensive, especially in the context of their business models as well as their own history," Prasad said, adding that retail investors are more exposed to the ongoing correction as institutional investors favor largecap stocks over midcap and smallcap stocks.

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The mid and smallcap funds of mutual funds had become ‘passive’ conduits for ‘active’ non-institutional investors who were probably more focused on momentum and narratives than fundamentals and numbers, he said.

and the AMFI (Association of Mutual Funds in India) have directed mutual funds to provide additional disclosures for small- and mid-cap funds from this month.

Earlier this week, Sebi chairperson Madhabi Puri Buch had flagged the issue saying there are pockets of froth in the market and that it may not be appropriate to allow that froth to keep building. She had even compared the valuations to "irrational exuberance".

The regulator has also noticed signs of manipulation in the SME (Small and medium enterprises) segment, many of which have given multibagger returns in just a few weeks.

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