Market Flat but Portfolio Bleeding: What’s Happening?
If you look at the frontline index, it has been trading flat for the last many sessions. The range of 17,200 – 17,225 on the upside and 16,850 – 16,825 on the downside is keeping the index from picking up a direction. However, the stability of the index is giving an illusion of suppressing fears in the market, which clearly, is not the case.
If you look at your portfolio, it is still bleeding day after day. In fact, the Nifty 50 index is absolutely flat for the last one year, delivering a negative 1.37% return but individual portfolios are significantly down in the same period. This is due to the ongoing divergence between large caps and small caps.
Investors seem to be moving toward a few large caps that are essentially holding the index. This generally happens during times of uncertainty when relatively safer stocks attract an increasingly high demand over smaller and more volatile peers. While the Nifty 50 index is down around 10.1% from the all-time high of 18,887.6, marked on 1 December 2022, the index is down 31.9% from the all-time high of 5,889.45, marked on 19 October 2021. Another interesting thing to note is when the large-cap index hit a new high in December last year, the small-cap index was still 23% off its previous high.
In a nutshell, Nifty’s 10.1% decline from ATH vs 50’s fall of 31.9% from the ATH is the primary reason for your red portfolio. These are index-level drawdowns. As it is hard to beat index returns even for fund managers, it’s not surprising that retail portfolios would be having higher drawdowns. So technically, these bleeding portfolios have more to do with the current divergence between big & stable businesses and small & volatile ones. Small-caps being more volatile have higher drawdowns than their larger peers, but the relentless sell-off in these counters is clearly visible. Midcaps are also taking a decent beating but not as severe as small caps.
So what could happen now? Generally, when these market-wide divergences form, two things are likely to happen in the near future, either small caps will rally to cope with the broader trend or large caps will take a hit which minimizes the divergence. If you want to capitalize on these dips, you can explore good small-cap mutual funds for the long term.
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