A bold warning from one of India’s top fund managers has sparked debate across the investment community. Sankaran Naren, CIO of ICICI Prudential Mutual Fund, raised eyebrows at the IFA Galaxy 2025 event by cautioning investors against mid-cap and small-cap SIPs.
His advice to pull out “lock, stock, and barrel” from these segments has ignited discussions about market valuations and risk.
Naren pointed out that the median P/E ratio for mid- and small-cap stocks has soared to 43x, a level he considers “absurd” and unsustainable.
He highlighted that the current rise in market capitalisation far outpaces profit growth, making these valuations highly risky for retail investors. Unlike the 2013-14 period, when these segments were attractively priced, Naren believes today's overvaluation leaves little room for significant returns.
One of Naren’s key concerns lies in the shifting risk dynamics. He explained that, in the past, financial mistakes were absorbed by banks and large corporates. Today, however, the risk has moved to retail investors, as companies raise funds directly through QIPs and IPOs instead of bank borrowing.
“All the risk is being borne by investors like you. I don’t think either investors or wealth managers have fully realised this yet,” he said, urging caution.
Addressing the widely accepted notion of SIPs as a foolproof strategy, Naren emphasized the importance of 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 said. He also warned that SIPs started in the current environment may struggle to deliver meaningful returns unless held for extremely long periods, such as 20 years or more.
Naren also flagged weakening momentum in small- and mid-caps, citing their fall below the daily moving average and increasing leverage in the system. He urged investors to reassess their portfolios and consider alternative strategies, such as hybrid funds.
“Hybrid funds are extremely attractive right now, depending on your market outlook. If you’re optimistic, equity-debt hybrids make sense. If you’re less confident, multi-asset funds with gold exposure could be better,” he suggested.
In a year he compared to the turbulent 2007-08 period, Naren’s message was clear: exercise caution, evaluate valuations critically, and look beyond the hype surrounding small- and mid-caps.