These inflated valuations raise concerns about an impending market correction. Historically, while the Nifty Midcap 100 has experienced sharp declines of 10% or more in a single month, the Nifty 50 has consistently outperformed both the Nifty Midcap 100 and Nifty Smallcap 100 indices.
Statistical data shows that while the Nifty Midcap 100 rallies more than 15% in four months and subsequently corrects, the Nifty 50 is more likely to outperform both the Midcap 100 and the Smallcap 100 in the subsequent months as shown below.
For instance, the Nifty Midcap 100 rallied up to 27.5% from January to April 2006 and then fell by 14% in May 2006. In such circumstances the Nifty 50 returned over 1.5% in June 2006 while the Nifty 1000 returned over 100%. posted negative returns during the same period. The table below shows the performance of these indices after similar events and declines in the past.
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Nifty Mid Cap 100 has rallied over 15% between May’24 to Aug’24. If the index closes at 59,200 – 59,250 or lower by the end of September, the above trend is likely to increase, making large-cap stocks more attractive compared to mid-caps and small-caps.
Supporting this shift, recent data from the Association of Mutual Funds in India (AMFI) highlights a growing preference for large-cap equities. In August, large-cap funds recorded net inflows of Rs. 2,638 crore – a 300% increase over July’s inflows, representing a four-fold jump. This trend underscores the growing appeal of large-cap stocks as a defensive strategy in a volatile market environment.
Further, historical patterns suggest that when large-cap funds experience a tripling of net inflows or a transition from net outflows to inflows, the Nifty 50 has outperformed the mid-cap and small-cap indices in the second month following this inflow. . This trend, observed consistently over the past five years, highlights the critical role of fund flow dynamics and timing in market performance.
For instance, if large-cap fund flows triple in August compared to July, the Nifty 50’s return in October is generally higher than the mid-cap and small-cap indices.
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