In the ongoing market correction, the most significant impact is being felt by the highly volatile smallcap and midcap stocks. After delivering exceptional returns over the past three years, investors are now selling these stocks amid valuation concerns and broader market weakness.
Around three dozen stocks in the Nifty Smallcap 100 index have fallen by 40% or more from their 52-week highs as of Wednesday’s session. Within this group, more than ten stocks, including Chennai Petroleum Corporation, IRCON, and ZEEL, have plummeted by 50% or more from their 52-week highs.
In the Nifty Midcap 100 index, nearly half of the stocks have declined by over 30% from their one-year highs, with 20 stocks down by more than 40%. Notable names like Cochin Shipyard, Idea, and Mangalore Refinery and Petrochemicals have each fallen by more than 50%.
While the benchmark Nifty50 index has dropped by 3% so far in 2025, the Smallcap index has fallen by 14.5%, and the Midcap index has declined by 11%. “Investors are severely punishing companies that report lower-than-expected earnings. These companies are not demonstrating the necessary earnings and revenue growth, indicating they are not fundamentally solid investments,” said Anand K Rathi, co-founder of MIRA Money.
Rathi added that as liquidity tightens and investor caution grows, further corrections in these stock categories, particularly smallcaps, are likely. “If you currently hold shares in a company that is underperforming or showing lower-than-anticipated earnings growth, I believe it may be time to exit those positions. Historically, we have seen corrections of 50-55% in years like 2018, 2019, and 2020, and we could experience a similar situation now,” he stated.
Vivek Sharma, VP & Investments Head at Estee Advisors, emphasized that smallcaps are inherently risky and should be approached with caution. He noted that while the Nifty Smallcap 100 has delivered a 14.34% CAGR since its inception—a respectable return by any measure—these gains have been highly uneven.
“For example, from 2004 to its peak in 2008, the index surged nearly sixfold, reaching the 6,000 level. However, it took until the end of 2020—more than a decade—for the index to surpass this level again and continue its ascent towards 20,000 before the recent correction brought it down to 16,000,” Sharma explained.
The concerns over inflated valuations in small- and midcap stocks were recently echoed by S Naren, veteran fund manager and CIO of ICICI Prudential AMC. He warned investors about absurd valuations and advised them to exit small- and mid-cap stocks entirely.