Bubble alert: India’s small-cap stock rush needs risk reduction
The Association of Mutual Funds in India has requested MF houses to take pre-emptive steps to safeguard investors. It took its cue from concerns raised by the Securities and Exchange Board of India’s (Sebi) over retail investors getting over-exposed to high-risk small- and mid-cap stocks. The market regulator’s worry is understandable.
Household investors have been falling head-over-heels in love with shares in these categories, attracted by sizzling price upshoots, even as more and more money coming in fuels a self-fulfilling rally in equities that has taken them past levels their earnings can justify. Over the last year or so, the benchmark small-cap index has climbed more than 70%, while the mid-cap index has risen by over 60%. In comparison, large-cap indices show gains of under 30%.
As estimated, flows into focused mid- and small-cap MFs in 2023-24 as a share of net inflows into equity funds have jumped to 42% from 29% in 2022-23 and 16% the year before. Which way retail investors are swinging is clear. Given the spike observed in mutual-fund folios, however, many of these investors are probably new to equity markets.
This means they may have no experience of the turbulence these segments may undergo if and when the tide turns. With plenty of money chasing rather few stocks, prices have skyrocketed, but the pace of these companies’ earnings growth has not been able to keep up. This has led to asset inflation, as visible in enlarged valuations.
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