Remarks by ICICI Pru AMC’s veteran fund manager S Naren at an event last week has sparked a furore among fund distributors and investment advisors. Speaking at the IFA Galaxy 2025, an event organized by a Chennai-based mutual fund association, the veteran fund manager advised caution regarding SIP investments in mid- and small-cap stocks. “We think it is a clear time to take out lock, stock, and barrel from small- and mid-caps,” he said.
Naren pointed out that while, in the past, a significant portion of the risk resided with banks and larger institutions, today, the risk lies with retail investors. He cautioned that 2025 could be the most dangerous year since the 2008-2010 period. “Investors lost money in many companies back then, particularly in banks. Many real estate companies also made mistakes by over-leveraging, but those mistakes happened indirectly—through banks and corporates. Today, when companies seek capital for acquisitions or new projects, they no longer rely on bank borrowing. Instead, they raise money directly from equity investors through qualified institutional placements (QIPs) or IPOs,” he explained.
He further noted that fund managers allocate money based on the inflows they receive, whether in mid-cap or small-cap funds. This means that despite already high valuations, fresh investments continue to flow into these segments, further fuelling equity capital raises.
Naren also emphasised that banks are taking minimal risks, which is evident from their balance sheets. “All the risk is being borne by investors like you. I don’t think either investors or wealth managers have fully realised this yet. It’s something I urge everyone to think about,” he added.
Additionally, Naren challenged the widespread belief that SIPs always yield good returns. While SIPs are an effective investment strategy, he stressed that their success depends on market conditions. “SIPs work best in volatile and undervalued asset classes. This is a crucial factor that the mutual fund industry is not considering,” he remarked.
Highlighting the risks investors are taking by pouring money into small- and mid-caps while assuming SIPs will protect them from volatility, Naren called the current valuation levels of these stocks "absurd." “No matter how you analyse them, mid- and small-cap valuations are extremely high. This is a stark contrast to 2013-14 when they were very cheap,” he noted.
He backed this claim with data, stating that the median P/E ratio for both mid- and small-cap stocks has now touched 43x. He also pointed out that the rise in market capitalisation of these companies has been disproportionate to their profit growth, making current valuations unsustainable.
Naren further warned that the momentum in small- and mid-caps is beginning to weaken. “The trend in small- and mid-caps has started to break, and they have fallen below their DMA (daily moving average),” he said. Sentiment, too, is becoming a concern. “We are seeing record inflows into mutual funds, and investor interest has surged. However, this has led to excessive leverage, which is now a major challenge,” he explained.
Concluding his argument, Naren advised investors to pull out of mid- and small-cap stocks, warning that even long-term SIPs in these segments may struggle to deliver strong returns. “When you invest in SIPs in small- and mid-caps today, you are essentially averaging at very high levels. This significantly reduces the chances of strong medium-term returns. If you’re doing a 20-year SIP from 2025 to 2045, then returns won’t necessarily be low. But for SIPs started after 2023, the risk of poor returns is very high—unless they are extremely long-term commitments,” he said.
Instead, Naren suggested investors consider hybrid schemes. “Hybrid funds are extremely attractive right now, depending on your market outlook. If you’re very optimistic about the market, equity-debt hybrid funds make sense. If you’re less confident, multi-asset funds—especially those with gold exposure—could be a better option,” he concluded.
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