Smallcaps Cheaper but Not Cheap Yet: Sonam Srivastava Urges Selective Investing

Why It Matters

The correction creates genuine value pockets, but lingering premium valuations and liquidity risk demand disciplined selection, influencing portfolio performance in a volatile, geopolitically‑sensitive environment.

Key Takeaways

• Small‑cap valuations fell 25‑30% but remain premium
• Select sectors like private banking, healthcare, infrastructure show FY27 upside
• Tactical asset allocation favors large‑caps and short‑duration debt during drawdowns
• Allocate 15‑20% to quality small‑caps for 3‑year horizon
• Gold and silver retain tailwinds; balanced portfolio suggested

Pulse Analysis

The Indian equity market has endured an 18‑month flat return stretch, amplified by geopolitical flashpoints such as the Iran conflict. Within this backdrop, the small‑cap index has shed roughly 25‑30% from its 2024 peak, compressing price‑to‑earnings multiples into the 18‑19× range for FY27 earnings. While this brings valuations closer to historical averages, a sizable share of constituents still command premium multiples relative to earnings quality, leaving a thin margin of safety. Consequently, investors must differentiate between genuine value and momentum‑driven rallies, especially given the sector’s heightened liquidity risk.

Srivastava’s playbook emphasizes selective exposure to themes where earnings visibility remains robust. Private‑sector banks are benefitting from credit‑growth recovery and stabilising NIMs, while healthcare firms ride domestic formulation pipelines and U.S. generic demand. Infrastructure‑linked capital goods and AI‑enabled IT services also present credible FY27 upside, provided investors stagger cash deployment across three to four tranches over six‑to‑eight weeks. Complementing equity bets with tactical allocation to large‑cap quality names during sharp drawdowns, and a modest short‑duration debt buffer, can enhance returns while mitigating draw‑down volatility.

Beyond equities, precious metals retain structural tailwinds. Central‑bank buying, de‑dollarisation and real‑rate uncertainty underpin gold’s rally, while silver benefits from industrial demand in solar and EV sectors. For a medium‑risk investor with a four‑to‑five‑year horizon, a diversified mix of 55% equity, 15% gold, 5% silver and 25% short‑to‑medium‑duration debt offers growth potential with downside protection. Regular rebalancing—accelerating equity adjustments and annual reviews of metal holdings—aligns the portfolio with evolving market dynamics and preserves the modest margin of safety that the current small‑cap correction affords.