Why ace investor Shankar Sharma doesn’t go for largecap stocks

“India has a lot of growth path which is clear in my mind. From our low rate of per capita GDP, we need to be there at $10,000”, Shankar Sharma said

Ace investor Shankar Sharma said he doesn’t invest in largecap companies as most of them have hit their ceiling in terms of fundamental valuation. “I do not look at largecaps. I have not owned banks for a long time. If you ask me where the Bank Nifty is trading right now, I don’t know. All the action has been in the small cap companies” Sharma said in an interview with Moneycontrol to usher in Samvat 2080.

“I’m fundamentally of the view that large caps have hit a certain size ceiling, at least for a while to come. If you look at the profits of a HDFC Bank or Kotak Mahindra Bank, aggregate relative to GDP, the numbers are astounding for a country like India,” Sharma said.

Private sector banking stocks have been underperforming for a year now. HDFC Bank is down 1 percent, Kotak Mahindra Bank is down 7 percent, ICICI Bank is up 4 percent, while Nifty 50 is up 6.8 percent in the year gone by.

Sharma pointed out that despite the market index Nifty not moving much in the last year, his net worth is substantially up due to smallcaps. He pointed out that the index hasn’t moved much because of underperformance of banks and Reliance Industries, which make up almost 55 percent of the index.

Meanwhile, Nifty Midcap 100 has advanced 25.3 percent in the past one year and Nifty Smallcap 100 has advanced 34.63 percent in the same period.

Also Read: Choice Broking bets on these 8 smallcaps and largecaps for Samvat 2080

When asked whether India can continue their growth without banks, Sharma said, “I remember in 2007, the same story was told about infra. India has grown 6-7 percent, but some of those old infra companies don’t exist anymore.”

Sharma recounted an event where the chief investment officer of a largecap mutual fund argued with him that small cap companies can’t do well in India. “He was very violent in that meeting. When I talked about smallcaps, he came short of catching hold of my collar and saying ‘smallcaps cannot do well, largecaps are the only way to make money in India’.”

According to Sharma, the reason for fund managers to bet on largecap companies is the difficulty to achieve Rs 1,000-crore AUMs because of size limitations and even if a manager gets it, it's impossible to manage it because of liquidity. Because of this “fund managers are predisposed to being bullish on largecaps because that’s where their bread is buttered,” Sharma added.

Sharma also advises investors that a lot of the noise that is being made is driven by personal biases and interests, pointing out the example of the fund managers.

Watch: Ace investor Shankar Sharma on where to look for winners in Samvat 2080

As per data compiled by Accord Fintech and shared by Capitalmind, 95 percent of active MF (mutual fund) AUM is invested in 382 stocks, 80 percent of AUM in just 178 stocks, and about 60 percent in just 79 stocks.

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