Why did Mirae's small-cap fund outperform in a tough 2025?

Summary: Neelesh Surana, CIO at Mirae Asset Investment Managers (India), discusses the factors driving the strong performance of the fund house’s equity funds, along with his outlook on the market, in this interview.

Despite being less than a year old, Mirae Asset’s small-cap fund delivered double-digit returns in 2025, comfortably outperforming its benchmark. According to Neelesh Surana, CIO at Mirae Asset, the fund’s outperformance can be attributed to a disciplined bottom-up stock-selection approach and a focus on businesses that continued to deliver earnings despite market turbulence.

In this interview, Surana, who manages the Mirae Asset ELSS Tax Saver Fund and the Mirae Asset Large & Midcap Fund, with a combined asset base of about Rs 70,800 crore, also explains the turnaround in performance across other equity funds at the AMC. He outlines why he expects double-digit earnings growth in the near term, why quality and valuation remain central to his investment decisions and how active management continues to play a meaningful role in the Indian market.

Markets are consolidating after a strong recovery. What are you watching closely to determine if this is just a pause before another rally or the start of a prolonged slowdown?

We prefer to view it as a consolidation phase. This perspective allows us to remain optimistic, as we believe the market is merely catching its breath after a robust recovery. The year 2025 has seen median returns dip into negative territory, influenced by several interconnected factors.

First, we are observing what we term ‘earnings fatigue’. This phenomenon occurs when momentum slows down due to broader economic challenges, particularly in the first half of the year. As companies grapple with these difficulties, earnings growth becomes less predictable, resulting in cautious investor sentiment.

Second, India has encountered significant valuation compression. Approximately 15 to 18 months ago, valuations were notably elevated, especially compared with those of other emerging markets experiencing surges. This discrepancy has led to persistent foreign institutional investor (FII) outflows, exacerbating the situation and contributing to global AI-driven rallies that have left Indian markets lagging.

Despite these challenges, 2025 marks the tenth consecutive year of positive market performance – a rare streak in the financial landscape. This resilience underscores the strength of the economy and the underlying corporate earnings that continue to support growth.

Looking forward, we anticipate an earnings recovery rather than a prolonged slowdown. Current valuations appear reasonable, suggesting moderate returns driven by earnings. A supportive macroeconomic environment, alongside fiscal measures and central bank monetary easing, strengthens our view. For instance, interest rates have dropped by about 1.25 percentage points, liquidity remains ample and various fiscal incentives are being implemented. However, we must remain vigilant about geopolitical risks and trade uncertainties that could threaten this outlook.

In conclusion, the recent market consolidation was largely driven by earlier premium valuations. We expect a stable environment ahead, with market returns closely aligned with anticipated earnings growth of approximately 12 to 14 per cent over the next couple of years.

Mid-cap and small-cap valuations look expensive, even as returns cooled off in 2025. How do you balance waiting for valuation comfort versus the risk of missing structurally improving businesses?

When discussing large-, mid- and small-cap stocks, it is crucial to avoid generalisations. Each company, sector and sub-sector requires a nuanced assessment based on historical valuations and current market conditions.

We have witnessed significant drawdowns even in select large-cap stocks. For instance, power utilities and a major retail sector large cap corrected sharply due to initially high valuation multiples that could not be sustained amid changing economic realities. This highlights that valuation risk is not exclusive to mid- and small-cap stocks; it can affect large caps just as easily.

The mid-cap and small-cap universe has expanded meaningfully over the past five years, with nearly 300 substantial IPOs (initial public offerings) entering the market. Many sector leaders that were once considered large caps are now classified as mid- or even small-cap stocks. This evolution indicates that there are attractive investment opportunities across this space, and size alone should not dictate portfolio construction.

Current market volatility is creating attractive entry points for mid- and small-cap investments. Historical trends suggest that when macroeconomic and sentiment-related headwinds ease, this segment tends to rebound strongly. We expect a significant rebound in small-cap earnings over the next four to six quarters. Our focus is on identifying businesses with robust earnings visibility, prudent balance sheets and scalable business models. Looking at a three- to five-year horizon, these businesses can emerge as meaningful compounders, contributing positively to overall portfolio performance.

Markets seem driven by narratives and momentum. Does that disadvantage a quality-and-valuation approach, or does it simply require a different kind of patience?

In today’s rapidly evolving financial landscape, narratives may drive short-term market movements, but they often fail to sustain long-term returns. Investing in quality businesses at reasonable valuations has proven effective across decades, supporting the idea that sound investment principles endure despite market trends.

When you purchase a quality business with sustainable growth, strong ROCE and capable management – while ensuring you do not overpay for it – the strategy tends to yield positive results over time. Although momentum-driven segments may outperform for certain periods, this does not alter the fundamental investment logic that prioritises quality and value.

As a fund house, maintaining discipline is paramount. Understanding a business's quality and applying a stringent valuation filter are critical components of our investment strategy. A good business does not automatically translate to a good stock if it is overpriced. While some sectors may require patience, the principle of avoiding overpayment for quality ultimately leads to returns that align with earnings growth.

Investors must recognise that the market's narrative-driven nature can create significant volatility, but those who remain steadfast in their quality-and-valuation approach often emerge stronger. This discipline allows for the identification of undervalued opportunities that are overlooked during periods of heightened speculation.

The turnaround in Mirae Asset’s equity funds has been striking. Several funds moved from the fourth quartile to the first over the last two years. How much of this recovery is due to market conditions versus internal portfolio decisions?

As we celebrate our eighteenth year in operation, the historical performance of our funds deserves recognition. The first 16 years were characterised by consistent top-quartile performance; however, the last two years have presented relatively soft returns. Notably, even during 2023 and 2024, funds that completed a decade of existence remained in the top quartile, demonstrating the strength of our investment philosophy.

The recovery to the first quartile has occurred without major strategic changes, validating our belief that the earlier drawdown was more a reflection of market mispricing than of fundamental mistakes in our investment approach. What has notably changed is how markets have become more discerning, with fundamentals aligning back with reality.

During the market dynamics of 2023 and 2024, certain segments rallied on compelling narratives, while we maintained balanced portfolios aligned with our core convictions. The recovery we’ve observed stems from adhering to our original investment principles. Portfolio composition has remained largely unchanged, allowing many earlier holdings to rebound effectively. As earnings began to broaden across various sectors, our diversified structure regained its performance edge. Importantly, this phase did not impair our five- or 10-year track records; instead, it reaffirmed our commitment to quality investing.

To summarise, earlier underperformance primarily reflected market mispricing – errors of omission rather than errors of commission. We have not materially changed our strategy, as the quality of our underlying businesses has remained intact. Continuous process refinements – particularly around risk calibration and stock accountability – have been vital to our approach.

You’ve stayed invested in select new-age technology companies. What supports this conviction?

In our investment philosophy, we do not draw a stark distinction between ‘new-age’ and ‘old-age’ businesses. The same rigorous criteria apply to both categories: sustainable growth, longevity, strong returns, capable management and reasonable valuation are paramount.

Several technology-led businesses have improved their unit economics while their stock prices have corrected, creating attractive entry points for investment. These companies often serve as sector disruptors with long growth runways, and if valuations remain fair, we are more than willing to invest, regardless of how they are labelled.

This philosophy reflects our commitment to identifying resilient businesses that can deliver solid returns over the long term, irrespective of market trends. Our adaptability in recognising value across sectors allows us to capitalise on opportunities that others may overlook.

Mirae entered the small-cap category after a strong rally. What guided the timing?

Our entry into the small-cap category was not driven by market timing; rather, it was about completing our product suite to meet the diverse needs of our investors. Small-cap investments are inherently stock-specific, and having strong bottom-up capabilities is essential for success in this segment. To bolster our expertise, we strengthened our investment team by adding Varun Goel two years ago, who manages the small-cap fund and the flexi-cap fund.

Investor interest in small caps is on the rise due to their higher growth potential and the ability to uncover undervalued opportunities. This interest is particularly pronounced among risk-tolerant investors, including Gen Z, millennials and experienced risk-takers, all seeking higher alpha in their portfolios.

Despite the challenges of a tough 2025, our small-cap fund delivered approximately 17 per cent absolute returns, outperforming the benchmark by around 12 per cent, placing it in the top quartile. While this is only an initial success, it reflects our ability to identify resilient businesses that can deliver solid returns even amid market headwinds.

Mirae has expanded passive offerings significantly. How do you see active and passive coexisting?

We view active and passive management as complementary rather than competitive. Each approach serves distinct purposes and is managed by separate teams with unique mandates. In the Indian context, active management continues to have the potential to generate alpha, primarily due to existing market inefficiencies. Meanwhile, passive strategies offer low-cost exposure to long-term wealth creation, making them an attractive option for many investors.

Our approach to passive investing is dual-pronged: we offer core passive products for broad market exposure while also providing differentiated products tailored for select investors. This comprehensive solution set is designed to align with varied investor goals, allowing us to cater to a wide array of preferences in the investment landscape.

As we continue to expand our offerings, we remain committed to providing value to our clients through both active and passive strategies, ensuring that they have access to the best tools for achieving their financial objectives.

Also read: Opportunity to create wealth is in small caps: HSBC Mutual Fund's Venugopal Manghat