February 14, 2025
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ICICI Prudential Mutual Fund maintains the lowest exposure to small and mid-cap stocks among India’s top five asset management companies (AMCs) by Asset Under Management (AUM), reflecting the cautious stance of Chief Investment Officer (CIO) S. Naren. Recently, Naren advised investors to completely exit small and mid-cap stocks, citing high valuations.
ICICI Prudential stands out as the only fund house among the top five whose exposure to small-cap stocks is in the single digits (9.58% of equity scheme AUM). Additionally, its mid-cap exposure of 11.61% within equity schemes is also the lowest among the five largest AMCs in India.
The largest AMCs in India by AUM are SBI Mutual Fund, ICICI Prudential Mutual Fund, HDFC Mutual Fund, Nippon India Mutual Fund, and Kotak Mutual Fund, in that order. These top five firms collectively manage nearly 54% of the total industry AUM as of December 31, 2024.
In contrast, Kotak Mutual Fund has the highest small and mid-cap exposure, with 52.09% of its equity scheme AUM invested in such stocks. HDFC Mutual Fund and Nippon India Mutual Fund follow, with 42.28% and 42.05%, respectively. Notably, Nippon India’s Smallcap Fund is the largest in India, managing Rs 57,009.70 crore as of January 31.
Naren’s comments, which stirred considerable debate, came during the IFA Galaxy 2025 event hosted by a mutual fund association in Chennai. He labeled current valuations as “absurd,” arguing that, unlike in 2013-14 when small and mid-cap stocks were undervalued, these stocks are now excessively priced.
According to Naren, the median price-to-earnings (P/E) ratio for mid and small-cap stocks has surged to 43x, with market capitalizations rising faster than profits. This, he argued, makes current valuations unsustainable. He also noted that the momentum in small and mid-cap stocks appears to be weakening.
Concerns about the valuation of small and mid-cap stocks and liquidity have been prevalent for over a year, even before Naren’s comments ignited reactions from other fund managers. In March 2024, the Securities and Exchange Board of India (SEBI) expressed concerns over a potential “bubble” in these stocks, with SEBI Chairperson Madhabi Puri Buch calling for stress tests of AMCs.
Since late 2024, small and mid-cap stocks have faced selling pressure and significant volatility. Over the past six months, the Nifty Smallcap 100 Index has fallen by almost 13%, and the Nifty Midcap 100 Index has dropped by around 11.47%. On Wednesday, both the BSE Midcap and Smallcap indices briefly entered bear territory, falling more than 20% from their September 2024 highs.
Despite these challenges, data from the Association of Mutual Funds in India (AMFI) for January shows that inflows into small-cap funds have increased by nearly 22% month-on-month.
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