ETMarkets Smart Talk: Mid & small caps still expensive — time to be cautious, warns Tarun Birani

“Small and mid-caps have softened but still remain expensive, suggesting potential caution for investors in these segments,” says Tarun Birani, Founder and CEO – TBNG Capital Advisors.

In an interview with ETMarkets, Birani said: “An allocation of 5-10% in precious metals, preferably through ETFs for ease of trading and liquidity, is advisable to provide diversification and stability to the portfolio,” Edited excerpts:

February was a weak month for the Indian market, but March looks stable. How are you viewing the markets?

Indian equity markets corrected significantly in February, with Nifty down ~6%, driven by global trade tensions, weak earnings, and FPI outflows. However, signs of stabilization are visible.

Large-cap valuations are nearing long-term averages, and with DIIs consistently buying, March is seeing more stability. From a structural lens, India remains on track for long-term growth. Corporate earnings growth remains resilient, with sectors like banking and auto showing steady performance.

The government's push on infrastructure and manufacturing via PLI schemes supports long-term economic momentum. Additionally, easing inflation and stable interest rates could further bolster investor confidence in the coming months.

What is your view on the US Fed decision? Do you see US markets topping out as there are signs of a slowdown?

The US Fed has adopted a wait-and-watch approach, keeping rates steady. US economic data points to a slowdown in consumer demand and industrial growth. While US indices like the S&P 500 corrected mildly, valuations remain elevated.

There could be pressure on US markets in H1-FY26 if earnings don't deliver or rate cuts get delayed further. The Fed's cautious stance signals uncertainty, and without stronger earnings growth, markets might struggle to sustain current levels.

Furthermore, any delay in rate cuts could dampen investor sentiment, particularly in sectors reliant on lower borrowing costs.

We are also in the last month of the financial year. How do you see fund flows for Indian markets in the next financial year? Has the valuation overhang corrected?
Valuations in large caps have corrected significantly—Nifty P/E is below 20x now, indicating more reasonable pricing.

Small and mid-caps have softened but still remain expensive, suggesting potential caution for investors in these segments.

Fund flows are expected to normalize, with FIIs having been net sellers recently, while domestic flows via SIPs and equity funds continue to be robust.

We have seen double-digit gains in Gold & Silver. How should investors approach precious metals in the next financial year? Is it time to increase allocation or book some profits?
Gold and Silver have experienced strong gains due to their role as hedges against inflation and global uncertainty.

Notably, silver is currently undervalued relative to gold, with the gold-to-silver ratio at 88:1, compared to the historical average of 65:1.

An allocation of 5-10% in precious metals, preferably through ETFs for ease of trading and liquidity, is advisable to provide diversification and stability to the portfolio.

Do you recommend retail investors diversify into global markets? What should be the ideal portfolio allocation?
Global diversification is a crucial strategy for managing geopolitical and currency risks, especially as domestic markets can be influenced by local economic cycles.

A 10-20% allocation to global equities through international mutual funds or ETFs helps investors tap into high-growth sectors and economies outside India.

Exposure to indices like the S&P 500 and Nasdaq 100 provides access to global leaders in technology and innovation, while thematic funds focused on trends like AI and energy transition offer targeted growth potential.

Moreover, investing internationally spreads risk across different economies, reducing overall portfolio volatility and enhancing long-term returns.

What are the big themes investors can track for the next financial year?
For FY26, several key themes are set to drive growth across sectors. Digital Transformation & AI is leading the charge, with AI revolutionizing industries like healthcare and finance, enhancing efficiency and innovation.

Private Credit & Alternative Debt are becoming more attractive as low interest rates and tighter bank lending push investors toward higher-yielding debt markets.

The government’s focus on infrastructure through its Capex & Infrastructure push will benefit sectors like construction and utilities, creating growth opportunities. Meanwhile, China+1 & Export-led Manufacturing positions India as a key alternative to China, boosting manufacturing and exports.

Lastly, Value & Business Cycle-Oriented Funds are expected to outperform as the economy recovers, with cyclical stocks in sectors like energy and materials offering strong returns. These themes offer diverse opportunities for long-term investors.

We have found some stability, but are there any other factors that could trigger another round of selling?
For FY26, several risks could impact market stability. The US Fed delaying rate cuts may slow growth and dampen corporate earnings. Escalating global trade wars, particularly between the US and China, could disrupt supply chains and hurt economic expansion.

Sharp FPI outflows might lead to volatility if domestic markets struggle to absorb the selling pressure. Earnings disappointments in small- and mid-cap stocks could cause corrections, impacting investor confidence.

Geopolitical events like tensions in the Middle East or Taiwan could trigger global instability. Lastly, the low VIX suggests market complacency and a sudden spike in volatility could lead to sharp corrections.

Looking at the December quarter results coupled with the tariff hikes seen in the past two months, what is your outlook for the March quarter for India Inc.?
The December results indicated margin pressure and muted sales growth, particularly within the SMID (Small and Midcap) universe, with tariff hikes potentially providing support to bottom-line expansion in select sectors like autos, energy, and commodities.

The BFSI sector remains a strong performer, benefiting from structural growth trends. Given the mix of strong and weak sectors, overall profit growth for FY26 is expected to be in the low double digits, with noticeable divergence across industries.

Sectors such as technology, consumer, and healthcare might continue to face headwinds, while cyclical and commodity sectors may benefit from ongoing policy support and demand recovery.

If someone plans to invest Rs 10 lakh in FY26, what should be the ideal portfolio allocation for investors aged 30-40?
For a high-risk investor in FY26, an optimal portfolio would balance growth with risk management.

It would start with 40% in equities, split between 20% in flexicap funds and 20% in Large-Cap Funds, combining stability with growth potential. 20% in Multi-Asset or Balanced Advantage Funds offers diversification across equity, debt, and gold, cushioning against volatility.

10% in Global Equity Funds or ETFs provides international exposure, managing geopolitical risks. 15% in Sectoral or Thematic Funds targets growth in high-potential sectors like infrastructure and technology.

Finally, 15% in Liquid or Short-Term Debt Funds ensures liquidity and stability, allowing tactical adjustments. This approach captures growth while managing risk.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)