ICICI Pru’s S Naren asks investors to protect 5-year gains, says midcap, smallcap stocks overvalued

Sankaran Naren of ICICI Prudential Mutual Fund said that Naren said that today’s challenge isn’t about making money, but preserving it.

After sparking widespread debate with his remarks on overvaluation in mid- and small-cap stocks, ICICI Prudential Mutual Fund’s Executive Director and Chief Investment Officer S Naren has urged investors to focus on protecting the gains made over the last five years.

While maintaining that India’s long-term growth story remains intact, Naren said in an e-mail response to Moneycontrol that mid- and small-cap stocks are now overvalued, and called for a diversified asset allocation strategy to manage risks.

Naren’s latest comments come on the heels of his remarks at an event last week, where he reportedly advised pulling out investments “lock, stock, and barrel” from mid- and small-cap stocks. Naren said, “As of February 2025, the goal for most investors should be to protect the money they’ve made over the last five years. Most investors who put money into equities or real estate during this period have likely earned good returns.”

Comparing the current scenario with the market environment from 2013 to 2020 -- when returns were minimal -- Naren said that today’s challenge isn’t about making money, but preserving it. “Currently, mid-cap and small-cap stocks are highly overvalued, while large caps are relatively more reasonable,” he said in the statement shared late last evening.

Valuation disparity between largecap and mid- and small-cap stocks; diversify investments

Naren attributed this valuation gap to foreign institutional investors (FIIs) offloading over Rs 1 lakh crore worth of large-cap stocks in recent months, inflating mid- and small-cap prices. “Small caps and mid-caps have rarely been as expensive as they are today, except perhaps in 2007,” he added.

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Considering the risks, Naren said investors need a diversified asset allocation strategy, recommending a mix of equities, debt, real estate, global stocks, and precious metals like gold and silver. “The best equity strategy today is not to put all your money into equities, especially mid-cap and small-cap stocks. SME IPOs and unlisted stocks are even riskier,” he warned.

Naren also clarified his earlier advice regarding systematic investment plans (SIPs), suggesting they be directed toward asset classes offering better value. “Today, large caps, flexi-caps, and hybrid funds offer better opportunities compared to mid-caps and small caps,” he said.

Continuing debate in the industry

Naren’s forthright views have continued to stir discussions in the mutual fund industry. His earlier remarks, where he cautioned that 2025 could be the most dangerous year for investors since the 2008 financial crisis, drew mixed reactions from fund distributors and advisors. Some industry participants criticised his bearish outlook on small- and mid-caps, while others acknowledged the valuation risks he highlighted.

Radhika Gupta, CEO of Edelweiss Mutual Fund, dismissed the alarm surrounding Naren’s comments, urging investors not to be swayed by short-term debates. “Don’t fall for fear-mongering or 10-day debates,” she posted on X and LinkedIn, adding that SIPs are designed as simple, long-term savings instruments for the average investor. She advised investors to find a good manager and hold investments sensibly over the long term, rather than reacting to short-term market noise.

Mahesh Patil, CIO of Aditya Birla Sun Life AMC, also pointed out the resilience of SIPs amid market volatility. “There will be ups and downs, but if you stay invested and keep putting in, it can give you long-term income, growth, and savings,” he said at an event. While he said that SIP growth may slow due to evolving market conditions, SIPs will remain a critical component of the Indian investment activity.

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