MUMBAI, Dec. 19 -- With the benchmark Nifty 50 trading just 2% below its 52-week high, India's equity market appears buoyant. But beneath the surface, a very different story is playing out. The Nifty Smallcap 250 remains nearly 12% off its peak, reflecting a sharp divergence that suggests investors are growing cautious about riskier corners of the market.

Market breadth underscores the unease. Only 10 stocks in the Nifty Smallcap 250 are within 0.5% to 9.9% of their 52-week highs. In contrast, 131 stocks are down between 10% and 30%, while another 90 have fallen even further-by 31% to as much as 69%, according to Bloomberg data.

The imbalance raises a key question: as largecaps power ahead, has investor risk appetite structurally shifte...