Should you stay away from mid- and small-cap space for the time being? Here's what Anil Singhvi suggests

Editor's Take:  The small- and mid-cap indices sharply declined on Wednesday. While the small-cap index, S&P BSE SmallCap, slid by 1.94 per cent, the mid-cap index, S&P BSE MidCap, slipped by 1.82 per cent. Such a sudden fall made investors wonder if the fabled run of these two categories was ending. Is it a blip, or will the decline continue? Zee Business managing editor and market guru Anil Singhvi decodes the reasons behind the downfall and suggests what investors should do amid such a decline. 

Singhvi says that, after the one-sided rally in mid-and small-cap stocks, such a fall is not worrisome. 

He says that the indices may fall further as they are already high, but he says that they will recover, and the investors don't need to panic.

Editor's Take: Why did small- and mid-cap indices fall?

Anil Singhvi says the fall is primarily because of three big actions by the mutual fund industry. 

First, a letter has been sent by AMFI to mutual fund houses, asking managers to slow down the fund flow in small- and mid-cap funds. 

The national mutual fund body suggests managers take less money in these two funds because more money than is required is coming into these funds. 

It says that entry into small- and mid-cap mutual funds is easy, but if there is a need to sell, there may be a problem. 

AMFI wrote the letter to fund houses on the instructions of SEBI. 

Therefore, mutual funds have stopped buying a bit. 

It means these funds want less money from the investors.

Second, some mutual funds said that they require a limited amount of money in their small-cap funds. 

They are either limiting the application or closing the entry into the funds for a short time. 

Thirdly, in terms of liquidity and weightage, funds are now liking large caps a little more. 

Singhvi says that one important factor is that the valuations of small- and mid-cap shares have become slightly more expensive than average. 

Small-cap stocks are trading at 28 times the EPS of the last nine months. 

The 5-year average for these stocks is 25 times. 

Therefore, they have become a bit expensive in terms of valuation. 

However, if seen from a future point of view, small and mid-caps are still not expensive. 

The midcap index is currently trading at 32 times, compared to the 28 times it usually trades.

Singhvi says that the second biggest reason for the decline is now that March is near. 

HNEs, brokers, banks, and mutual funds that invest in mid-caps also want to reduce their positions at the end of the year. 

At this time of the year, most financiers withdraw their money. 

In such a situation, it seems that as we approach March, the funding may decrease. 

Some banks have also reduced investment in small- and mid-cap shares. 

Singhvi says that the third major reason is the promoters. 

Taking advantage of this boom in the market, promoters are selling their shares under pressure.

Editor's Take: What can happen next in small- and mid-cap stock categories?

Singhvi says that investors need not panic if their perspective is more than four weeks. 

There may be a further decline of 3–4 per cent in the index in March. 

But if it picks up speed, investors can make money from it. 

The way there has been a rise in stocks like power, PSU, and defence, there can be a correction in the same proportion. 

He says that at this time, the focus should be on time-wise action instead of price-wise action. 

Time-wise action means not paying attention to whatever happens till March. 

There is an upward trend in the six months before and after the elections. 

If you can hold it for a month, you do not need to take any tension in such a situation.