'Small caps fairly attractive after the recent correction'

The recent market downturn has been particularly severe on the small-cap space. However, Ajay Khandelwal, Fund Manager at Motilal Oswal Mutual Fund, sees an opportunity in small caps post-correction, citing reasonable valuations and strong financials as key factors. Currently, Khandelwal oversees 14 funds at the AMC, including the Motilal Oswal Small Cap Fund, which gave the highest returns in its category last year. In this interview, Khandelwal gives reasons for the strong performance of his small-cap fund and why some of his other funds have underperformed lately. But first, let's take his opinion on the US tariffs. Small-cap stocks have been hit hard by the recent market volatility following the US tariff announcement. Is this the beginning of a prolonged consolidation phase? There are near-term challenges, such as the deferment of capex by corporations and an increase in inflation, that can impact discretionary spending in the US, which will impact Indian businesses. So, we expect volatility to continue until the tariff structure is clarified. Once that is settled, Indian businesses will be beneficiaries of relatively lower tariffs compared to other countries, and a reduction in prices of various commodities, etc, will help improve both the top and bottom lines. We expect an interest rate cut of 75 basis points, low inflation and improvement in liquidity in domestic markets. Also, last year, this time, growth was slower because of elections, and we will have the benefit of a benign base. We expect markets to benefit from the above-mentioned factors, so our advice to investors is to remain invested and use this opportunity to add to their equity allocation, as market multiples are also at historical levels. Which sectors are likely to do well in the coming months, and which might face headwinds? We believe sectors focused on catering to domestic demand will do well in the near term. Defence spending worldwide is increasing, which will help accelerate order flows. Financials will see improvement in earning