Walking the talk: ICICI Pru MF least exposed to small, midcaps among top five fund houses

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ICICI Prudential Mutual Fund has the least exposure to the small and midcap space among India's top five fund houses in terms of Asset Under Management (AUM), echoing CIO S Naren's caution, as he recently advised investors to pull out money 'lock, stock, and barrel from small and midcaps' citing expensive valuations.

Read more on S Naren's clarification here, on his comment that sparked a debate on overvaluation in the broader market space. 

ICICI Prudential is the only fund house among the top five whose smallcap exposure as a percentage of equity scheme AUM is in single digits, at 9.58 percent. The fund house's midcap exposure of 11.61 percent within pure equity schemes too  is lowest among the five largest AMCs in India.

India's biggest asset management companies (AMCs) are SBI MF, ICICI Prudential MF, HDFC MF, Nippon India MF and Kotak MF, in the same order. The top five fund houses account for nearly 54 percent of the total industry AUM as on December 31, 2024.

The biggest SMID exposure has been taken by Kotak MF, whose 52.09 percent of the equity scheme AUM is invested in shares of small and midcap companies. Kotak is followed HDFC MF and Nippon India MF, whose SMID exposure is 42.28 percent and 42.05 percent, respectively. Nippon India MF’s Smallcap Fund is the largest in India, with an AUM of Rs 57,009.70 crore as on January 31.

ICICI Prudential Fund's CIO, S Naren had stirred a debate following his comments about 'exiting lock, stock and barrel' out of small and midcap stocks, citing expensive valuations.

At the IFA Galaxy 2025 event, organized by a Chennai-based mutual fund association, Naren had called current valuations 'absurd', emphasizing that unlike 2013-14 when these stocks were undervalued, shares of these companies were now extremely expensive.

Naren said the median P/E ratio for mid and smallcap stocks has surged to 43x, with the market capitalisation rising disproportionately compared to their profit growth, making current valuations unsustainable. The momentum in small and midcap shares seemed to be showing signs of weakening, Naren added.

The valuation of small and midcap stocks and concerns around liquidity have been around for more than a year now, even before Naren's comments evoked strong reactions from other money managers.

In March 2024, small and midcap shares came under capital market regulator Sebi's glare, with chairperson Madhabi Puri Buch expressing concerns over a potential 'bubble', and called for 'stress tests' of AMCs.

Since late 2024, mid and smallcaps have been under selling pressure, with bouts of extreme volatility. The Nifty Smallcap 100 Index has fallen nearly 13 percent in the last six months, while the Nifty Midcap 100 has fallen around 11.47 percent over the same period.

The BSE Mid and Smallcap indices briefly entered bear territory on Wednesday, dropping more than 20 percent from their respective highs, last touched in September 2024.

Despite the challenges of steep valuations, the AMFI data for January revealed that inflows into Smallcap funds have in fact risen nearly 22 percent month on month.

While fund managers agree that small and midcap valuations are a concern, Sandeep Bagla of Trust MF said he is optimistic about India’s long-term growth, emphasizing a 3-5 year investment horizon, despite near-term volatility.

“Valuations must be viewed in the context of growth and earnings potential. Investors should use market volatility in the next 2-3 months to invest for the next 3-5 years,” Bagla said, pointing at the correction in recent months, and stressed on the importance of asset allocation.

“It’s not about throwing away the baby with the bathwater but adjusting the mix - including fixed income, small/mid and largecap equity funds - to navigate market cycles,” Bagla added.

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