Small turns painful for investors

Lack of buying interest puts BSE small-cap index almost back to where it was a year ago.

If you are among one of the thousands investors who have built portfolios around small and mid-cap stocks, on Thursday may have been your last chance to get out with even marginal profits gains for the last one year.

With frontline stocks flying around at prices not seen since the beginning of the year, stocks of small and medium sized companies are finding virtually no takers and witnessing a rapid price fall.

"When there is a panic situation, even those who buy usually confine themselves to the well known, large-cap stocks, resulting in a much higher volatility in the smaller stocks," says Prakash Rajdev, Chief Dealer at Khandwala Securities.

"And right now, it is the high networth individuals and to a lesser extent small investors who are selling while nearly the only buying is coming from the institutional side which has cushioned large-cap prices," he points out.

The lack of buying support has led to many of the smaller stocks, which had doubled their value over the last one year, shaving off nearly all of the gain.

As a result, the BSE Small-cap index, a measure of the prices of more than 500 stocks on the exchange, which was giving a 90 per cent annual return a month ago, is almost back to its year-ago value on Thursday with a razor-thin gain of just 7.95 per cent.

In the last one month, it has fallen by a whopping 38 per cent, while the frontline Sensex corrected by only 26 per cent. On Thursday itself, 260 out of the 800 stocks on the small and mid cap indices on the BSE fell by 10 per cent or more, erasing gains built up over many months (see chart.)

"It is too late to get rid off small stocks and buy large caps now," says technical analyst Asit Mehta of asitcmehta.com, "you will only be booking losses."

Though even a smaller correction in the wider market tomorrow will push the small-cap index into negative annual returns, Mehta says now is the worst time to sell.

"Prices in smaller stocks are ridiculously low right now and investors who bought them for their growth potential must remember that nothing has changed about the companies," he says.

The most resilient among the non-sectoral indices on the BSE after Thursday's fall was the Sensex, which has held on to more than 43 per cent of its gains since May 8 last year, followed by the BSE 100 and BSE 500.

Interestingly, the small-cap index, which is just 7.95 per cent above its 12-month-ago mark, still delivers nearly 20 per cent returns for some one who had entered the stocks a month before that, indicating the sharp rally that took place in May last year.