Small and Mid-Cap Stocks Still Overvalued, May Underperform: Nippon India MF’s Sailesh Raj Bhan:

Sailesh Raj Bhan, CIO of Nippon India Mutual Fund, has expressed caution regarding the current valuations of mid- and small-cap stocks. In an exclusive interview with Moneycontrol, he warned that despite a recent market recovery, nearly two-thirds of stocks in this segment remain overvalued and may underperform going forward.

Correction Driven by Valuation and Earnings Weakness

Unlike large-cap stocks, which saw a selloff between October and December driven by FII exits and weak results, the mid- and small-cap segments corrected mainly due to:

Excessive valuations

Earnings disappointments
“Unreal money flowed into these stocks last year, pushing them into bubble territory,” Bhan said.

Only 30–40% of Mid-Caps Fairly Priced

Of approximately 150 mid-cap stocks tracked by Nippon India MF, only about 50 are currently in a fair value range.

Large caps: Attractively valued post-correction

Small caps: Still stretched, likely to lag in performance

Bhan emphasized that this adjustment would not be sudden: “The correction will unfold gradually, driven by earnings rather than panic.”

Valuation Anchoring Could Be Risky

Bhan cautioned investors against anchoring expectations based on inflated valuations seen in previous years.
Some examples of overvaluation include:

Fragile businesses with quarterly profits of ₹20 crore being valued at ₹10,000 crore

Liquidity-driven spikes unsupported by fundamentals

“In tighter liquidity environments, such inflated valuations may correct by 50–70%,” he noted.

IPOs and Micro-Caps Under the Scanner

IPOs, Bhan says, are another area showing bubble-like traits, requiring careful scrutiny. Micro-cap stocks, often ignored by institutional investors and held largely by retail traders, have seen the most severe corrections—with some losing up to 70% of their value.

Individual investors, particularly those chasing momentum plays, have faced steeper losses than mutual funds due to weaker fundamentals, he added.