Notwithstanding concerns about lofty valuations, smallcaps recorded their most significant monthly gain in nearly three years in November.
The National Stock Exchange Nifty Smallcap 100 finished the month with a 12 per cent gain, the most since February 2021 when it rose by 12.2 per cent.
After declining by 4.1 per cent in the preceding month, the Nifty Midcap 100 rose by 10.4 per cent, the most since July 2022.
The benchmark Nifty50 rose by 5.5 per cent, the most since July 2022, while the S&P BSE Sensex advanced by 4.9 per cent, the most since October 2022.
The gains in the benchmark indices were less than those in the US, Europe, and some Asian markets like South Korea, which saw double-digit gains.
The blockbuster month for equities was due to growing risk appetite following a sharp retreat in US bond yields.
Bond prices rallied as investors pinned hopes on early rate cuts following supportive economic data and favourable commentary from US Federal Reserve officials.
From this year's lows, the smallcap and midcap indices have rallied by around 50 per cent and 40 per cent, respectively, supported by strong inflows from retail investors - both directly into equities and through the mutual fund route.
For smallcaps, liquidity is comparatively low, and hence they see a sharper rise during bull markets and sharp declines when there is a market downturn.
This time around, the rally has largely been supported by retail flows, said Deven Choksey, managing director of KRChoksey Holdings.
While small and midcaps have scaled new record highs, the Nifty50 is less than 60 points shy of surpassing its record closing high of 20,192 on September 15.
Among sectoral indices, the Nifty Realty registered the highest gains at 18.4 per cent in November, followed by Nifty Pharma and Nifty Auto indices, which rose by 15.1 per cent and 10.6 per cent, respectively.
The market construct has turned bullish, aided by favourable global and domestic clues.
FPIs turning buyers for five days in a row and domestic institutions buying aggressively indicate a strong trend, which can take the Nifty past its record high.
However, with India's market capitalisation (mcap) crossing $4 trillion and the mcap-to-gross domestic product ratio climbing to 120 per cent, valuations are
getting stretched.
But in the short run, the market is likely to move ahead of fundamentals, said V K Vijayakumar, chief investment strategist, Geojit Financial Services.
Among the Nifty50 components, Bharat Petroleum Corporation and Hero MotoCorp rose the most at around 24 per cent each.
Bajaj Finance and State Bank of India were the only two Nifty stocks to end with losses.
The New India Assurance Co., RattanIndia Enterprises, and Bharat Heavy Electricals gained the most in the top 500 universe.
Foreign portfolio investor (FPI) flows turned positive after two months of sharp outflows.
In November, overseas funds poured nearly Rs 15,000 crore into domestic equities.
These include Rs 8,148 crore of inflows seen on Thursday, largely due to the rebalancing in the Morgan Stanley Capital International index.
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