'Large and mid caps look better placed than small caps'

Summary: After a volatile start to 2026, markets are forcing investors to choose substance over stories. Large caps look more reasonably priced, mid caps are throwing up selective opportunities, and small caps demand caution. This conversation with Kotak MF’s Shibani Kurian explains how earnings, valuations and portfolio construction are shaping decisions in this phase.

After a choppy start to the year and an uneven market correction, Shibani Kurian sees the opportunity set becoming clearer, even as selectivity remains crucial. The Senior Fund Manager and Head of Equity Research at Kotak Mutual Fund, Kurian brings over two decades of experience in Indian equity markets and has been with Kotak AMC since 2007. She oversees six equity schemes with combined assets of Rs 14,742 crore, including the four-star-rated Kotak Focused Fund.

In this conversation, Kurian explains why large and mid caps now offer a more favourable risk-reward than small caps, how earnings delivery is regaining importance after a muted phase and why disciplined stock selection anchored in growth at reasonable valuations matters more than chasing market sentiment.

Markets have corrected recently, though unevenly across sectors. How are you reading the market at this stage, and has this correction meaningfully changed the opportunity set for investors?

2026 has started off slightly volatile for our markets. Our view has been that markets are typically driven by three key factors: fundamentals as a starting point, flows and sentiment. Now, before I come to the fundamental aspect of what is happening in the market, in terms of sentiment, there has been considerable uncertainty driven by global geopolitical risks and trade and tariff issues that continue. Added to that, if you look at it from a sentiment perspective, there has been some negative and volatile sentiment, primarily driven by the fact that flows, especially foreign institutional investor flows, in January have been negative. FIIs have been net sellers to the tune of almost $3.8 billion, countered by strong domestic flows.

Now, if you look at the market in the context of fundamentals, keeping sentiment and flows aside for the moment, the last six quarters have seen fairly muted earnings growth in Indian markets. That has been one of the reasons why, relative to other markets, India’s valuation appeared expensive, especially when viewed in the context of emerging markets. But today, when you look at India, especially given that India has underperformed in the 2025 calendar year and even in January, what we see is that valuations, in relative context to emerging markets, particularly if you look at the premium at which India trades, have come down to long-term average multiples.

The second point is that, from here on, we expect the earnings trajectory to improve. We are in the midst of the third-quarter earnings season, and so far, if you look at the 21 Nifty companies that have reported numbers as we speak, earnings have been largely in line with expectations. Therefore, going into FY27, we expect earnings for Nifty companies to improve closer to the mid-teens.

Now, in that context, when you look at markets today, large caps are trading at reasonable valuations, broadly in line with their long-term averages, so the risk-reward appears favourable. Mid caps, on the other hand, have delivered strong earnings over the last few quarters and have been beating expectations. Therefore, while mid caps trade at multiples above their long-term averages, given the strong earnings profile of the mid-cap segment, we see bottom-up opportunities there.

Where we continue to remain cautious is in small caps. Here, earnings delivery has been poor. In fact, if you look at earnings expectations versus actual delivery, there has been a considerable mismatch. Valuations, both absolute and relative to the Nifty, are trading at significantly higher premiums. Therefore, from a portfolio construction perspective, we do expect large and mid caps to be better placed than small caps. Ultimately, for the markets, earnings delivery will be the key driver going forward.

In today’s market, is stock selection more about avoiding overvaluation or identifying businesses where earnings expectations remain underappreciated?

I think it is the latter. Of course, our portfolio management philosophy has always been growth at a reasonable price. However, when you look at the markets today, as we were discussing earlier, earnings delivery has been a constraint over the last five to six quarters. Therefore, identifying stocks where the expectation of earnings remains strong is one of the key factors in bottom-up stock picking, more so when you look at mid-cap and small-cap segments.

As I mentioned, in small caps, the gap between expectations and delivery has been considerable. Expectations have been high, but actual earnings delivery has not met those expectations. In the context of elevated valuations, we remain cautious on the small-cap segment. Therefore, we prefer to look at companies from a bottom-up perspective, where there is certainty—or at least a higher probability that earnings delivery will continue or improve from current levels, while valuations remain reasonable.

So, in the current market environment, I think stock selection will involve a mix of avoiding excessive valuations and identifying underappreciated earnings potential, with a clear, sharper focus on the earnings trajectory going forward.

You manage multiple equity strategies with very different mandates. At a philosophical level, what are the core principles that guide your investing, and which of these have stayed constant across market cycles?

Our investment philosophy has always been growth-biased, with a clear emphasis on buying growth at reasonable valuations. For us, the starting point in evaluating any company is the business itself. We typically try to identify companies with sustainable growth and operating in an environment that allows them to gain market share. As a starting point, we seek to understand the key factors driving market share gains, whether they are sustainable, the competitive intensity in the industry, and the risks of obsolescence. Ultimately, we want to assess what gives us confidence that the company will continue to gain market share, and whether that growth is scalable and sustainable. That forms the first leg of our evaluation.

The second important factor we always keep in mind is corporate governance. While we look for high growth, we also place strong emphasis on management quality, because it often drives differences in the multiples at which companies trade. Therefore, we focus on factors such as capital allocation discipline, accounting and audit quality, whether the company adequately considers minority shareholder interests while making key decisions, and its ability to deliver in line with its stated vision. This aspect becomes extremely important in our investment process.

Finally, when we look at valuations, while we do emphasise reasonable valuations, it is important to remember that valuations must always be assessed in the context of balance sheet strength, cash flows, quality, and return ratios. Looking at valuations in isolation can often lead to mistakes. Instead, we evaluate valuations alongside earnings growth and the company's return on equity profile. Fundamentally, we view value creation as occurring when a company earns a return on equity above its cost of equity. These are the kinds of businesses we would want to own in our portfolios. And then, of course, depending on the sector, we also assess valuations across various relevant metrics as part of our overall evaluation.

Kotak has also launched a Dividend Yield Fund at a time when markets are becoming more selective. Dividend yield strategies typically focus on mature businesses with stable cash flows, which in the Indian context often implies a large-cap bias. What does the current market environment tell you about the relevance of this strategy at this stage of the cycle?

The strategy for dividend yield is fairly straightforward. We are looking at companies that have demonstrated a track record of either paying dividends or undertaking buybacks over the last three years. These are typically companies with stable businesses and strong cash flows, which enable them to return cash to shareholders.

This becomes particularly relevant during periods of market volatility, as such a strategy helps navigate uncertain conditions by focusing on good-quality businesses with stable operations and predictable cash flows. There is often a perception that high dividend-yielding companies are largely state-owned or concentrated in a few sectors. However, during our evaluation of this strategy, we found that several companies across sectors, both public and private, have demonstrated a consistent track record of dividend payouts or buybacks.

For example, this can include banks, both public and private, technology companies, utilities, and even consumer-facing businesses where dividend payouts have been consistent. Therefore, the portfolio construction will focus on two key factors: one, the company’s dividend track record, and second, whether the company is seeing an improvement in its earnings trajectory, in line with our broader framework of business quality and management quality.

As a result, this strategy combines the best of multiple elements. There is a value component, as many of these companies trade at valuation multiples below the index or benchmark. There is stability through dividend yield, and there is also potential for capital appreciation. In that sense, it brings together the best of all three worlds. Historically, the Nifty Dividend Opportunities 50 TRI has performed reasonably well across market cycles- the caveat being that the past performance is not an indicator of future returns. During periods of market drawdowns, while the Dividend Opportunities 50 TRI does experience declines, the drawdowns tend to be relatively lower. At the same time, during bull markets or market upswings, the strategy participates in the upside. From an investor’s perspective, we believe this is a useful strategy to have as part of the overall asset allocation, especially in periods of heightened market volatility, which is why we felt this was an opportune time to launch it.

Given the fund’s flexible mandate, how do you see the portfolio evolving over time, and how should investors think about this strategy alongside your Focused and Contra funds?

The risk profile of a strategy like Focused is somewhat different. Investors need to evaluate where they stand within their overall asset allocation. The Focused Fund is better suited for investors with a relatively high risk appetite, given its concentrated strategy of around 30 stocks. Contra and dividend yield, on the other hand, are more value-biased strategies. Therefore, for investors who feel they have a gap on the value side of their asset allocation, either the contra or the dividend yield strategy could be suitable, given the nature of these portfolios and their relatively more defensive, value-oriented characteristics.

Also read: 'Even after the correction, mid and small caps aren't cheap'