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Research The Signal Rebalancing Small and Mid caps?

Rebalancing Small and Mid caps?

Written by - Fisdom Research

March 23, 2024 5 minutes

Recently, the mid and small-cap segments have witnessed a significant shift, prompting investors to reassess their investment strategies. Here’s a overview of the situation and actionable insights for investors

The recent correction in mid and small-cap stocks has been a topic of discussion, partly due to concerns raised by regulatory bodies such as the Securities and Exchange Board of India (SEBI). This correction has been attributed to frothiness in certain segments of the market, prompting regulators to take proactive measures to manage liquidity risks.

SEBI’s directive for mutual funds to conduct stress tests and disclose outcomes reflects a proactive approach to risk management in a volatile market environment. While this correction has raised concerns, it’s essential to note that certain pockets of the market still hold value amidst the turbulence.

For investors, especially those heavily exposed to mid and small-cap stocks, it’s crucial to reassess their portfolio allocation and risk tolerance. With industry guidance suggesting potential outperformance of large caps in the coming year, reallocating excess gains from mid and small caps to large caps may be a prudent move.

Investors with a long-term perspective can continue investing in mid and small-cap funds through systematic investment plans (SIPs) and systematic transfer plans (STPs). However, caution is advised when making lump sum allocations, given the near-term volatility driven by factors such as upcoming elections and regulatory concerns.

New investors entering the market with a long-term perspective should consider flexi-cap funds. These funds offer flexibility in asset allocation, allowing fund managers to navigate through various market conditions effectively. Flexi-cap funds can help mitigate risks associated with specific segments such as mid and small caps.

Exit Strategy for Mid and Small Cap Funds:

When deciding whether to exit from any mid or small-cap fund, investors should consider various factors beyond just regulatory stress testing. It’s essential to assess overall portfolio allocation, risk tolerance, and investment time horizon before making any decisions.

Do Large caps hold Value?

Before considering investing in large-cap funds, investors should evaluate their existing portfolio to avoid overlap among similar mandate funds. Opting for funds that bring unique value to the portfolio is crucial in achieving diversification and maximizing returns.

Another factor here is to consider whether to choose from active investing or passive investing in large caps. When deciding between active and passive investment strategies for large-cap stocks, it’s vital to consider the level of overlap among funds. While both approaches have their merits, investors should be mindful of excessive overlap, which can diminish the benefits of diversification.

Market this week

 18th Mar 2024 (Open)22nd Mar 2024 (Close)%Change
Nifty 50₹ 21,990₹ 22,0970.5%
Sensex₹ 72,587₹ 72,8320.3%
Source: BSE and NSE
  • The Indian market saw moderate gains for the week ending March 22 amidst heightened volatility.
  • This was influenced by the Federal Reserve’s decision to keep interest rates unchanged and maintain its forecast for three rate cuts in 2024.
  • Additionally, a decline in crude oil prices and subdued guidance from global IT player Accenture contributed to the market’s movements.
  • The Nifty Information Technology index faced a significant decline of 6 percent following Accenture’s downward revision of its full-year revenue growth projection.
  • Conversely, the Nifty Realty index saw a notable increase of 5.4 percent, while the Nifty Auto and Metal indices each added 4 percent.
  • Foreign institutional investors (FIIs) intensified their selling activity during the week, offloading equities worth Rs 8,365.53 crore.
  • In contrast, domestic institutional investors (DIIs) showed buying interest, purchasing equities worth Rs 19,351.62 crore.
  • Overall, the market exhibited resilience despite mixed cues from global and domestic factors, with certain sectors experiencing gains while others faced challenges.

Weekly Leaderboard

NSE Top GainersNSE Top Losers
Stock Change (%)Stock Change (%)
Maruti Suzuki India7.50 %Infosys(7.66) %
TATA Steel7.13 %TATA Consumer(7.38) %
Bajaj Auto7.12 %TCS(7.31) %
Apollo Hospitals6.56 %Wipro(5.78) %
Eicher Motors6.48 %HCL Technologies(5.43) %
Source: BSE

Stocks that made the news this week:

  • Lemon Tree Hotels’ share price remained steady in early trading as the company announced the signing of a new property in Ranchi, Jharkhand. Expected to open in fiscal year 2025, the franchised hotel will comprise 45 rooms along with amenities such as a restaurant, bar, banquet facilities, meeting rooms, swimming pool, fitness center, and other public areas.
  • Paytm shares surged above Rs 410, marking a significant rebound of around 32 percent from its 52-week low of Rs 318.35 recorded in February. This upward trend reflects a gradual recovery for the company during this period. Paytm’s recent approval by the National Payments Council of India (NPCI) to function as a third-party app, akin to competitors like Google Pay and PhonePe, has contributed to its positive momentum. Additionally, partnerships with major banks such as Axis Bank, HDFC Bank, SBI, and Yes Bank further ensure a smooth transition and bolster Paytm’s business operation.
  • Indian IT services stocks experienced a significant downturn as pessimism engulfed the sector following tech giant Accenture’s downward revision of its revenue guidance. The uncertain economic environment has led clients to reduce spending on consulting services, impacting companies across the board. LTIMindtree shares hit a two-month low, while Infosys witnessed its most substantial decline in eight months. HCL Tech recorded its highest decline in 15 months, accompanied by a surge in trading volumes for all IT counters. Additionally, shares of Tech Mahindra slipped to an eight-week low amid the sector-wide sell-off.

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