SEBI flags concerns over overheated small, mid-cap valuations

The Securities and Exchange Board of India (SEBI) issued a cautionary statement on Monday, highlighting potential areas of irrational exuberance within the equity markets. Specifically, the regulator expressed apprehension regarding stretched valuations in small and mid-cap stocks, coupled with significant inflows into mutual funds targeting these segments.

SEBI stressed on the need for mutual fund trustees to scrutinise the suitability of lump sum investments in small and mid-cap funds, stressing the importance of preventing speculative froth from accumulating. Madhabi Puri Buch, SEBI Chairperson, underscored the urgency of addressing these concerns promptly.

In response to the escalating situation, SEBI mandated mutual funds to disclose stress test results for small and mid-cap funds starting March 15. The move aims to evaluate the responsiveness of mutual funds in exiting portfolio positions during periods of market stress.

The Nifty small-cap 100 and mid-cap 100 indices have surged by 58 per cent and 54 per cent, respectively, since the onset of 2023, outpacing the 23 per cent rise in the benchmark Nifty 50 index.

Despite apprehensions regarding excessive inflows into these segments, small-cap stocks dominated equity mutual fund inflows in February, as per industry data released on Friday.

(With Reuters inputs)