February 10, 2025
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‘It’s a clear time to take out lock, stock and barrel from small and midcaps’: S Naren’s ominous advice to investors
Veteran fund manager S Naren’s recent remarks at the IFA Galaxy 2025 event, hosted by a Chennai-based mutual fund association, have stirred significant discussion among fund distributors and investment advisors. Naren’s message was clear and cautionary—he recommended that investors reconsider their positions in small- and mid-cap stocks, advising to “take out lock, stock, and barrel” from these segments.
He explained that the risks today are no longer confined to banks or large institutions, but are increasingly borne by retail investors. Naren believes 2025 could be one of the most perilous years for investors since the 2008-2010 financial crisis. Reflecting on the past, he noted that while mistakes in the previous downturn were made indirectly through over-leveraged banks and corporates, today companies are raising capital directly from equity investors, bypassing traditional bank borrowing. This shift, he warns, exposes investors to even greater risks.
Naren pointed out that fund managers, in response to inflows, continue to allocate capital into mid- and small-cap stocks, even as their valuations reach unsustainable levels. Despite high valuations, investments keep flowing, fueling further equity capital raises. “This creates a dangerous cycle where investors are unknowingly assuming the majority of the risk,” he cautioned, adding that wealth managers may not fully grasp the situation either.
Challenging the popular notion that SIPs (Systematic Investment Plans) always lead to positive returns, Naren stressed that SIPs are most effective in volatile and undervalued asset classes. “The mutual fund industry is not fully accounting for this crucial factor,” he remarked. He further warned that many investors are misled by the belief that SIPs can shield them from volatility. With the current high valuations in small- and mid-cap stocks, he called the situation “absurd,” highlighting that their median P/E ratio has reached an alarming 43x—far above historical norms.
Backing this claim with data, Naren emphasized that the surge in market capitalization of small- and mid-cap companies is disproportionate to their profit growth, making current valuations unsustainable. He noted that momentum in these stocks is already weakening, with their performance slipping below the daily moving average (DMA). “We are seeing record inflows into mutual funds, but excessive leverage is becoming a serious concern,” he added.
Concluding his warning, Naren advised investors to exit small- and mid-cap stocks, cautioning that even long-term SIPs in these sectors might fail to generate strong returns. “Investing in SIPs in small- and mid-caps today means averaging at very high levels, which significantly diminishes the likelihood of robust medium-term returns,” he explained. However, for those committed to long-term investments, Naren suggested that SIPs initiated in 2025 may eventually prove successful, though the risks remain high for those entering after 2023.
Instead of focusing on small- and mid-cap stocks, Naren recommended considering hybrid funds, which could offer a more balanced approach. For investors with an optimistic outlook, equity-debt hybrid funds might be the best fit, while those more cautious could look toward multi-asset funds, particularly those with gold exposure, to better hedge against market uncertainty.
Naren’s cautionary advice urges investors to reassess their portfolios and carefully consider market conditions before committing to high-risk sectors.
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