Froth in smallcaps has cooled, opportunity improved: Viraj Gandhi, SAMCO MF CEO

Smallcaps may have seen sharp swings in recent weeks, but the long-term structural narrative for the segment remains strong, according to Viraj Gandhi, CEO of SAMCO Mutual Fund, in an exclusive conversation with Pranati Deva of LiveMint.

Despite tighter SEBI surveillance and a more cautious market mood, Gandhi says the valuation reset has actually created a more sustainable landscape for serious long-term investors. With the launch of SAMCO’s latest small-cap offering — pitched as India’s first momentum-driven small-cap strategy — he explains why momentum continues to be one of the most effective sources of alpha generation. Edited Excerpts:

How would you describe the current sentiment in the Indian small-cap space, especially after the recent volatility and regulatory caution from SEBI?

Despite recent volatility, sentiment in the Indian small-cap space remains constructive because investors continue to view small-caps as long-term, high-alpha generators with access to niche sectors unavailable in large- or mid-cap segments. This has supported sustained inflows into small-cap mutual funds. SEBI’s recent caution — centred on stress-testing, liquidity disclosures and concentration checks — may have caused short-term jitters but is ultimately healthy for the ecosystem. These measures enhance transparency, improve resilience, and protect investors during sharp market moves. For patient investors, the long-term structural opportunity in small-caps remains intact and compelling.

How do you view the timing and relevance of the SAMCO Small Cap Fund in the current market environment?

The launch of the SAMCO Small Cap Fund comes at a highly relevant time, as it will be India’s first momentum-based small-cap fund — distinct from existing peers that rely on Quality, Value, Growth or blended styles. Momentum has historically been the most consistent and highest alpha-generating factor, with the Nifty Smallcap250 Momentum Quality 100 Index outperforming the Nifty Smallcap 250 TRI by a nearly 6% CAGR over 20 years, effectively tripling wealth over the benchmark.

With momentum-oriented indices having corrected meaningfully over the past year, the current setup is far more attractive. For investors building a minimum five-year small-cap allocation, adding a momentum sleeve through the SAMCO Small Cap Fund provides a differentiated, evidence-backed edge. To clarify, the portfolio will be diversified — not concentrated.

Do you believe small-caps still offer attractive risk-reward at this stage of the cycle, or is the segment entering an overheated zone?

Yes, small-caps continue to offer an attractive risk-reward, especially after the meaningful correction in momentum-based small-cap indices over the past year. Excess froth has cooled, valuations have normalised, and the segment is healthier today than during last year’s euphoric phase. This is a stage where long-term investors can accumulate rather than react to short-term volatility. From a five-year perspective, the current reset creates a favourable entry window to build a high-conviction small-cap portfolio.

The IPO market has seen a mix of aggressive pricing and strong listings. What trends are you observing, and should retail investors be cautious?

The IPO market is currently witnessing strong investor appetite alongside increasingly aggressive pricing. While several offerings list well, not all sustain their gains, reflecting a more selective and sentiment-driven environment. Retail investors should remain cautious and focus on business quality and long-term fundamentals rather than short-term listing hype.

Corporate earnings for FY25 have been resilient. Which sectors are likely to drive earnings growth going into FY26?

Corporate earnings in India have held up well. Looking ahead into FY26, sectors likely to lead growth include financials (with middling credit but improving margins), oil & gas (benefiting from higher realisations), and metals (supported by improving spreads). Together, these sectors are expected to contribute a large part of incremental earnings growth.

What is your market outlook for 2026? Will it be a year of bull runs and new highs?

India enters 2026 with a supportive macro backdrop — growth-focused government measures, recent GST tweaks and a more dovish RBI stance creating room for easier financial conditions. Corporate earnings remain strong, with festive-season demand, healthier margins and an improving earnings-to-GDP ratio indicating continued strength. Steady domestic SIP flows offer a reliable base, and improving global risk appetite could draw more foreign participation. These factors together build a credible bull case for markets aiming for new highs, though global volatility and pockets of stretched valuations warrant caution.

What challenges could lead to a weak 2026?

A weaker 2026 cannot be ruled out, especially if global factors turn adverse — such as renewed inflation pressures, delayed rate cuts by major central banks, or geopolitical flare-ups disrupting commodity prices and capital flows. Markets could face turbulence if global growth slows meaningfully. On the domestic front, certain segments are trading at stretched valuations, making them vulnerable to even small earnings disappointments. These risks could temper sentiment and lead to a more volatile or subdued year.

Do you see FPIs turning buyers in December? Or will outflows continue?

Predicting FPI activity on a monthly basis is difficult, as flows often swing with global risk sentiment and US yields. What matters more is the long-term trend, where India continues to gain weight in global EM portfolios and remains a key component of the MSCI Emerging Markets index. As global investors eventually rotate from the US to emerging markets, India is likely to be among the biggest beneficiaries. While near-term volatility may continue, India’s longer-term FPI outlook remains constructive.

One piece of advice for new investors.

New investors should avoid chasing recent returns or hot themes — markets can change far faster than expectations. Set realistic goals, understand that returns come in cycles, and avoid comparing your journey with others. Focus on disciplined investing, asset allocation and staying invested through ups and downs. Over the long term, patience and consistency matter far more than timing.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.