"Due to worsening macro situation, investors are moving into safer zone," says Ravi Muthukrishnan, head-institutional equity research, Elara Securities.
Shuffling of stocks by equity mutual funds to comply with the new categorization norms has partially led to the fall. But experts say the real issue that has spooked investors is the micro headwinds such as weakening of the rupee, surging bond yields and rising fuel prices.
The top 10 losers in the Nifty Smallcap index have lost more than 40 per cent since January 15, when the index touched a record high. Reliance Naval, Hindustan Construction and Reliance Communications have plunged over 60 per cent each. While stocks such as Jet Airways, IFCI and Allahabad Bank have crashed nearly 50 per cent each. The components of the Nifty Midcap index have dropped even more. Vakrangee, PC Jeweller and Adani Power are down 89 per cent, 72 per cent and 53 per cent respectively.
"The valuation premium of midcaps and smallcaps over large caps was very high. We were expecting the premium to come down substantially. We are seeing that play out now," he added.
The sharp fall in some of the stocks has caught several money manages off guard. A lot of funds focused on the small- and midcap stocks are staring huge losses.
Experts say the stocks in this space could correct further as investors will try to shift to largecaps which are holding the ground.
"We expect midcaps to further fall as investors to switch to large-caps. However, one shouldn't completely ignore this space. The recent falls also provides an opportunity to buy quality midcaps," said Muthukrishnan.