Small-cap stress: Investors feel the squeeze as liquidity tightens

small-cap schemes has risen sharply over the past year, reflecting thinning volumes and weaker market depth.The largest fund in the category, Nippon India Small Cap Fund, required 44 days—up 13 days from a year ago—to sell half its portfolio if faced with redemption pressure. The Quant Small Cap Fund saw the steepest increase, with liquidation time rising by 31 days to 87 days, while the HDFC Small Cap Fund and the SBI Small Cap Fund took 71 and 66 days, up 9 and 4 days, respectively.This is when the benchmark BSE Smallcap 250 Index has declined only moderately—6.2% in January, compared with a 10.3% fall in January 2025—suggesting the underlying stress is more structural: lower participation and waning risk appetite are making exits harder, particularly in a downtrend when small caps tend to underperform broader markets.The BSE Sensex declined 3.5% in January, compared with a 1% fall in the same month last year.Exchange data showed India’s overall market capitalization shrank by ₹21.35 trillion from an all-time high of ₹482 trillion at the start of January.

A year ago, market value had declined by ₹18.48 trillion to ₹425 trillion amid concerns over the impact of US President Donald Trump's tariffs on global trade."The overall market cap tells a story of how small-cap investors have borne greater pain than other cohorts even before the West Asia war began,” said G. Chokkalingam, founder at equity research and advisory firm Equinomics Research Pvt.

Ltd.In small caps, even modest inflows can push stock prices sharply higher, while small outflows can trigger disproportionately deeper declines compared with mid- and large-cap stocks, according to S. K.