Mint Explainer | ICICI MF Naren’s SIP warning: Reality check or fear-mongering?

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Subscribe to enjoy similar stories. ICICI Prudential AMC's S. Naren recently cautioned investors against putting their money into small-cap and mid-cap funds through systematic investment plans or SIP, calling these an “overvalued asset class".

Speaking to mutual fund distributors at an event, the executive director and chief investment officer at ICICI Prudential Asset Management Company said the risk in the financial system had shifted from banks to SIP investors. His remarks triggered a heated debate among industry leaders, with some fund managers dismissing his concerns as fear-mongering. Mint explains what Naren’s advice means for SIP investors and the broader market.

Naren presented four key arguments for pausing SIPs in mid and small-cap funds while favouring large-cap investments: First, he said there’s been a risk transfer in the financial system from banks to MF investors. Companies are raising money from the stock market rather than going to banks. Second, he said valuations on mid- and small-cap companies have reached extremely high levels.

Third, while SIPs work in the long run, investors find it difficult to stay invested for 20 years, he said. Behaviourally, it is very difficult. Fourth, he said large-cap companies look more attractive due to FII selling and India’s healthy macro position.

Also Read: S. Naren has an advice for investors: protect gains made over past five years Historically, investments in the stock market have been distributed in a 70:20:10 ratio: Large caps (top 100 companies by market cap) account for the lion’s share of the overall market profit pool. In some years, however, large caps have had a bigger share.