Mint Explainer | ICICI MF Naren’s SIP warning: Reality check or fear-mongering?
Source: Live Mint
Speaking to mutual fund distributors at an event, the executive director and chief investment officer at ICICI Prudential Asset Management Company said the risk in the financial system had shifted from banks to SIP investors. His remarks triggered a heated debate among industry leaders, with some fund managers dismissing his concerns as fear-mongering.
Mint explains what Naren’s advice means for SIP investors and the broader market.
Why did Naren caution against SIPs in mid- and small-caps?
Naren presented four key arguments for pausing SIPs in mid and small-cap funds while favouring large-cap investments:
First, he said there’s been a risk transfer in the financial system from banks to MF investors. Companies are raising money from the stock market rather than going to banks.
Second, he said valuations on mid- and small-cap companies have reached extremely high levels.
Third, while SIPs work in the long run, investors find it difficult to stay invested for 20 years, he said. Behaviourally, it is very difficult.
Fourth, he said large-cap companies look more attractive due to FII selling and India’s healthy macro position.
Also Read: S. Naren has an advice for investors: protect gains made over past five years
Are mid-cap and small-cap stocks overvalued?
Historically, investments in the stock market have been distributed in a 70:20:10 ratio:
- 70% in large-cap stocks (the top 100 companies by market value)
- 20% in mid-cap stocks
- 10% in small-cap stocks
Large caps (top 100 companies by market cap) account for the lion’s share of the overall market profit pool. In some years, however, large caps have had a bigger share. For instance, in 2014, the share of large-caps was 77%, and in 2019, it was 75%. It has now dropped to as low as 60% on account of the money gushing into mid- and small-cap companies.
Another way to see this is the price-to-equity or PE ratio. The Nifty Midcap 100 has a PE ratio of 35.4 and Nifty Small Cap 250 has a PE ratio of 29.8. Both have a higher ratio than the Nifty PE of 20.8. Mid- and small-caps have recorded faster growth, but whether this justifies a much higher PE is an open question.
Why does the industry disagree with Naren?
Many mutual fund industry leaders disagreed with Naren’s warning.
Radhika Gupta, CEO of Edelweiss Mutual Fund, asked investors not to fall for “fear-mongering”. She cited data from Edelweiss’s midcap fund (launched in 2007), which has delivered a minimum 10-year rolling return of 8%.
Aashish Sommaiyya, CEO of Whiteoak AMC, said ICICI AMC is contradicting what it does. “The discussions are about throwing everyone under the bus even as you garner AUM and launch NFOs. After market starts falling you say to clients and intermediaries your entry timing was wrong, your expectations are unrealistic, I didn’t want to launch but sales team didn’t listen, fund managers don’t know how to manage liquidity etc,” he tweeted.
What do the numbers say?
Mid- and small-caps have delivered stellar returns since the covid-19 pandemic. According to data from Value Research, the smallcap category has delivered a CAGR of 27.50% over the past five years (as of 10 February 2025), and the midcap category has delivered 23.5% returns.
These returns have boosted long-term averages, but past performance doesn’t guarantee future performance. Given high valuations, the next decade may not replicate these gains.
Notably, mid-caps delivered negative returns between 1994 and 2002 and between 2006 and 2013, according to Naren.
What should investors do?
Having a diversified portfolio can help reduce your risk. This includes not going overboard on mid- and small-caps. Last year, the markets regulator Securities and Exchange Board of India (Sebi) had asked AMCs to conduct stress tests on their small-cap funds to ensure that redemptions from investors can be met in case of a market panic.
“Today, large-caps, flexi-caps, and hybrid funds offer better value compared to mid- and small-caps. We recommend asset allocation as a core strategy, focusing on large-cap, flexi-cap, and hybrid funds for SIPs and avoiding overvalued segments like small caps and mid-caps,” Naren said in an interview with Mint.
By putting money in a flexi-cap fund you can effectively outsource this decision to a professional fund manager. This can also reduce your tax outgo. Rebalancing within a flexi-cap fund does not attract tax. However, if you invest in separate large and small-cap funds and rebalance between these by redeeming your investments, you may have to pay capital gains tax.
Also read | Sachet SIPs: Can ₹250 a month create an investment boom in India?
