'Kotak Small Cap Fund's dip is cyclical, not structural'

Summary: With small- and mid-cap valuations running high, broad exposure is no longer enough. In this conversation, a seasoned fund manager explains why the market has moved from "own the basket" to "own the best" and how his investment style blends quality, growth and pragmatism to stay resilient amid market shifts. Small- and mid-cap stocks have surged in recent years. Valuations now look stretched, raising doubts about whether the rally can sustain. For Harish Bihani, the answer lies in sharper selectivity. With over 16 years of experience, the fund manager at Kotak Mahindra AMC manages three funds with total assets worth around Rs 23,700 crore and believes the market has moved from “own the basket” to “own the best”. His philosophy blends quality, growth and discipline, anchored in scalable businesses and strong management. In this conversation, he discusses the Kotak Small Cap Fund’s recent challenges and how his investment approach is evolving across mandates. Small and mid caps have run up sharply over the past 2–3 years, and valuations look stretched. Do you think they’re overpriced now, or is there still value left in this space? After the strong rally in small and mid caps, valuations at the index level are clearly on the richer side. However, opportunities still exist where structural tailwinds align with strong management execution. These include sectors like hospitals, diagnostics, domestic pharma, niche manufacturing benefiting from PLI and supply chain realignment, select capital goods, auto ancillaries and certain market share gainers in discretionary consumption. Many of these are small-cap names that are leaders in their respective spaces. The market, in our view, has shifted from a phase of “own the entire basket” to “own the best.” This simply means investors must be far more selective about what they buy or hold in their portfolios today. In the small-cap space, especially, the hurdle rate for any new position has to be meaningfully higher. Broad-based exposure looks less attractive, but bottom-up alpha opportunities remain. They are compelling, but capturing them requires us to work harder, be far more disciplined, and much more selective. How would you describe your own investment style and philosophy? What really guides your decisions across the different funds you manage? Our investment policy across funds is straightforward. We aim to identify scalable business models that have the potential to outperform the market, address a significant customer need and are led by strong promoters and management teams. We seek companies with strong financial strength and improving earnings, as evidenced by double-digit earnings growth, ROA (return on assets) expansion and enhanced cash fl