Mid-Caps Dive 5-Month Low as FPIs Pull ₹1 Lakh Cr, Valuations Remain Elevated

India’s mid‑cap segment witnessed its steepest decline in five months during July, positioning the country as one of the worst‑performing equity markets globally in that period. The fall comes amid intensifying selling pressure across mid‑ and small‑cap stocks, dragging overall market capitalisation down sharply.

According to data compiled by Moneycontrol, India’s mid‑cap indices slumped in July, marking the worst performance among major markets after only four other countries recorded deeper losses. This comes as a further blow to a segment already under strain in 2025.

Broader Market Under Strain

The sharp decline forms part of a broader correction that began in late 2024 and has persisted into 2025. Benchmark indices Sensex and Nifty have posted sustained losses, while valuations in smaller‑cap segments have remained stretched.

Mid‑ and small‑cap stocks also faced record monthly losses in February when the Nifty Mid‑Cap 100 dropped more than 10% and the Small‑Cap index nearly 14%, marking the steepest fall in these segments since March 2020.

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Valuation and Liquidity Concerns

Analysts attribute the sell‑off primarily to expensive valuations and tepid corporate earnings. The Nifty Mid‑Cap index trades at more than 35x forward P/E and the Small‑Cap index at about 24x, significantly above their 10‑year averages of 22.4x and 15x, respectively. Even after sharp declines, valuations remain high and margins are elevated, leaving these sectors vulnerable to further corrections if demand slows or earnings disappoint.

Tight liquidity in the broader financial system has compounded the situation. Experts highlight that elevated interest rates and restricted credit availability have hit mid‑size firms particularly hard. Foreign portfolio investors (FPIs) have withdrawn more than ₹1 lakh crore from Indian equities in 2025, further weighing on SMID (small and mid‑cap) stocks.

Retail Investors Bear the Brunt

The correction has severely impacted retail investors, many of whom had invested heavily in mid‑ and small‑caps via mutual funds and SIPs. Assets under management (AUM) for these funds had surged in recent years—small‑cap funds reached ₹3.30 lakh crore and mid‑cap ₹4 lakh crore by end‑2024—but are now facing significant losses, with average declines exceeding 14%.

With over half of small‑ and mid‑cap stocks trading below their 200‑day moving averages, investor sentiment remains fragile and technical indicators suggest more pain may lie ahead.

Relative Global Underperformance

While global equity markets posted gains in 2025—such as the U.S., China, U.K., France, and Canada—India’s stock market capitalisation has registered the steepest fall among emerging markets. According to Bloomberg, the BSE total market cap of all listed companies fell 3.6%, the largest monthly decline since February this year, to $5.2 trillion from $5.38 trillion.

Conclusion

India’s mid‑cap segment endured its sharpest decline in five months during July, amid a broader slump that has battered small‑ and mid‑cap valuations through 2025. Elevated price‑earnings ratios, weak corporate results, tightening liquidity, and massive FPI outflows have collectively driven this correction. Retail investors face heavy losses, and technical indicators point to further headwinds. Until valuations re‑align or investor confidence returns—possibly driven by earnings recovery or policy easing—mid‑cap stocks are likely to remain under pressure.