Smallcap, midcap stocks overvalued? How to invest Rs 1 lakh in shares in 2024

Valuations on many smallcap and midcap stocks look unreasonable and a handful of brokerages believe investors aged 20-30 years, with moderate risk appetite, should be looking to invest about 50-60 per cent of their incremental investments in large cap stocks in 2024. Out of, say, Rs 1 lakh proposed investment, investors should be investing Rs 50,000-Rs 60,000 in large cap stocks and the rest in midcap and smallcap stocks, analysts said.

At 27 times one-year forward PE, the Nifty Midcap100 index trades at 35 per cent premium to its average valuations, against a less than 20 per cent premium for the Nifty. This makes the smallcap an midcap stocks susceptible to a sharp sell-off, Jefferies said in its latest note.

Arpit Jain, Joint MD at Arihant Capital Markets said as someone in his 20-30 years with a moderate appetite to risk, he would invest 60 per cent in large cap stocks and the remaining 40 per cent in midcap and small cap stocks, which would allow his portfolio the opportunity to generate high returns.

"As a young investor, one can afford to take slightly higher risk, and investing 60 per cent in large cap gives an investor the cushion to take some risk into high growth companies," Jain said. 

Deven Mehta, Equity Research Analyst at Choice Broking said investors aged 20-30 years with a moderate risk appetite may consider a strategic allocation for 2024. Mehta said investing 50 per cent in largecap stocks, 30 per cent in midcap stocks, and allocating the remaining 20 per cent in smallcap stocks can be a prudent approach.

"This allocation is grounded in the observed performance trends of 2023, where midcap and smallcap stocks delivered remarkable returns and that the risk-reward ratio appears more favourable for large cap stocks."

Shrikant Chouhan, Head- Equity Research at Kotak Securities said largecap and megacap shares are likely to outperform midcap and smallcap stocks in 2024. He expects earnings growth of midcap companies to be better than smallcaps. Chouhan said smallcap stocks look most expensive as compared to their earnings growth potential. He said his investment mandate is to invest a minimum of 50 per cent in large caps, 30 per cent in midcap and 20 per cent in small caps, irrespective of market conditions, to generate optimal returns.

An asset allocation strategy with a well-diversified portfolio is the key to managing risk and ensuring low deviation from the expected outcome, said Tanvi Kanchan, Head - Corporate Strategy at Anand Rathi Shares and Stock Brokers.

"Everyone’s risk taking capabilities differs and there are various ways to measure risk tolerance. Investors must understand the overall risk associated with the asset allocation strategy. A moderate investor with a long-term view on the market can look at allocating 50 per cent in largecap, 20 per cent in midcap and the balance 30 per cent into small caps," Kanchan said.

Sunil Nyati, Managing Director, Swastika Investmart said largecap stocks are gaining momentum after a recent phase of underperformance, presenting a promising opportunity for investors, particularly if there's an influx of foreign institutional investments in the domestic market.

"I recommend maintaining a 50 per cent allocation in largecap names to capitalise on potential positive shifts in this segment. However, it's crucial not to overlook the opportunities in the midcap and smallcap space, especially in the context of anticipated political stability, potential interest rate cuts, and robust economic growth. To ensure a well-rounded and diversified portfolio, I suggest allocating 30 per cent to midcap stocks," Nyati said. 

A 20 per cent allocation to smallcap stocks complements this strategy, offering the prospect of tapping into emerging opportunities in the dynamic market environment, he added.

 

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