Mid-cap crisis

The sharp decline in the prices of various mid- and small-cap stocks in the recent sell-off shows how susceptible they remain to market sentiments. It is true that even blue chips have been slaughtered in the selloff, however, the mid- and small-caps have always been more volatile. They tend to outrun the index — both on the upside and the downside. Another characteristic feature of mid-cap stocks has been the huge swings in liquidity. These stocks tend to attract a lot of interest when the going is good, but liquidity dries up quickly and substantially in the event of a decline. This not only prevents investors from exiting their positions but also contributes significantly to price volatility.
In recent times, however, there have been signs that this could change. Last year, one report pointed out that FIIs were moving beyond the top 100 companies and that the FII ownership of BSE 200 companies had gone up significantly. It also mentioned that the huge breadth and range of companies in India was one of the attractions of the Indian market. Investors, according to the report, had gone down to companies with a market cap as low as $1 million. The increasing number of mid-cap mutual funds and funds focused on emerging companies also promised to create adequate liquidity as well as reduce volatility in these stocks. The steep and quick decline has belied those hopes to some extent. Continuously improving disclosure and listing norms have weeded out errant companies considerably. However, investors are yet to be adequately educated about the intrinsic riskiness of placing bets on mid- and small-caps in the hope of catching a multi-bagger. Serious efforts need to be put in to establish a functional SME exchange. A special exchange or platform for smaller companies will make risks more apparent to the investor.


-- The Economic Times Editorial