In the ongoing rout in the small- and mid-cap space that has drained portfolios, investors have been advised by experts to take refuge in large-caps. But are all large-cap stocks safe?
Jumping out of the frying pan into the fire — this is the situation that investors would have found themselves in, had they chosen the large-cap index ‘Nifty Next 50’ or its constituent stocks.
The index, also known as Nifty Junior, comprises those large-cap stocks that are not part of the Nifty 50 index.
No different vs small caps
Nifty Next 50 index has lost 22.3 per cent since the fag end of September 2024, when the market entered a correction phase.
This also happens to be the time when many indices — Nifty 50, Nifty Next 50, Nifty Midcap 150 and Nifty Smallcap 250 —hit their all-time highs.
- Read: Mid- and small-cap funds: Is the stress lower after the recent correction?
Although the Nifty Next 50 index is classified as a large-cap index, its 22.3 per cent decline surpasses even the small-cap index’s 20.2 per cent drop. In contrast, the Nifty 50 corrected by just 12.9 per cent during this period.
This difference actually makes sense when the sectoral composition of Nifty Junior is compared with that of Nifty 50.
- Read: Volatility is the middle name of small-cap mutual funds. Here are the strategies to navigate it
While weightage to sectors such as FMCG, healthcare, auto and metals are largely equivalent to that of Nifty 50, there is a stark contrast in the weightage of sectors such as financial services, consumer services, power, IT and capital goods.
Realty sector, which has a 3.6 per cent allocation in Nifty Junior, has zero weightage in Nifty 50.
Nifty Junior stocks in the financial services sector such as IRFC, REC and Jio Financial are down anywhere between 37 per cent and 46 per cent from their 52-week highs. Similarly, IRCTC, Avenue Supermarts and Zomato from the consumer services space are down between 23 per cent and 35 per cent.
Capital goods stocks such as ABB, BHEL, HAL and Siemens have lost close to 40 per cent.
The three Adani Group stocks from the power sector (see infographic), JSW Energy and NHPC have lost 33 per cent to 60 per cent. Such deep cuts can well be compared to the correction in the constituent stocks of the small-cap index.
High beta
Also, the beta (calculated with data of the trailing year) of Nifty Next 50 index in relation to Nifty 50 (Nifty 50 is considered as the market portfolio) is quite high at 1.41.
- Read: Sensex, Nifty 50 long-term outlook: Is the bull run over?
This is only a few decimal points away from the beta of the small-cap index, which is 1.47.
This shows that Nifty Junior has been as volatile as the small-cap index over the past year. Hence, the next time you hear large-caps are relatively better placed, be sure to ask which and what type of large-caps.
After all it does appear, the Nifty 50 and Nifty Junior are as different as chalk and cheese.
Investors shouldn’t rely on large-caps solely for their size; selecting the right stocks remains crucial even in this segment. Valuations are paramount.
Most of the stocks mentioned earlier were trading at valuations that were unsustainable.
Hence, got punished big time when the market entered a correction phase, with the large-cap tag providing no cushion.