'Small investors with no capacity for high risk shouldn't...': NSE boss' note of caution

NSE MD and CEO Ashishkumar Chauhan on Wednesday said small investors with no capacity to manage high risk levels shouldn't enter riskier parts of markets.

Stressing on higher entry barriers risky products, Chauhan said leverage must be used for investors who can afford risk. 'Equity F&O size seems large, but premium volume less," he told an audience at the 
SEBI-NISM Research Conference.

The small-cap category stress seems to expanding, with the fall extending for a third day on March 13. 
The benchmark Nifty 50 was trading lower by over a percent at 12:30 PM, with serious weakness visible in the markets as more than 3,333 shares were in decline versus 422 advances. 869 stocks were locked up in the lower circuit on NSE.

The weakness is reportedly attributed to brokers asking clients to unwind positions because of increased risk perception. 

Should you press panic button?

Smallcaps are all about bottom-up investing. Analysts say while the rich valuations may cap upside in the short run, the long-term prospects for many smallcap companies are strong.  

"Fundamentally, the smallcap250 index has seen drastic improvement in earnings growth (26 per cent CAGR over FY22-24) supported by overall good economic recovery post COVID; market share gain led by formalisation of economy; and strong balance sheet improvement across sectors. In addition, policy initiatives around Make in India and PLI incentives should drive positive delta change in earnings across different sub-segments particularly in the smallcap space," said Ankit Jain, Senior Fund Manager at Mirae Asset Investment Managers (India).

The BSE Smallcap index is up 60 per cent in the last one year. The NSE Smallcap250 index has delivered similar returns. Jain said Nifty Smallcap250 is trading at around 22 times EPS on 1-year forward basis, which is at 21 per cent premium to historical average and almost 50 per cent premium to valuations around March 2018 levels.

"The market breadth is declining, which is a sign of mean reversion in mid/small cap stocks from over bought trajectory. Mid and small cap indices have rallied 35 per cent since October 2023. Intermediate corrections to the tune of average 12 per cent in mid and small caps have been a bull market norm. At present 8 per cent correction is behind us," ICICI Securities said in a note.