" ...biggest risk for stock market investors in 2025" - Sankaran Naren, CIO- ICICI pru MF

Summary

Shankar Naren, Chief Investment Officer at ICICI Prudential Mutual Fund, warns that 2025 could pose significant risks to investors, comparable to the 2007 global meltdown. His concerns focus on SIP investments in overvalued sectors, particularly midcap and small-cap stocks, where many investors are chasing returns at the peak of valuations. While Naren remains optimistic about India's macroeconomic outlook, he emphasizes the importance of diversification and long-term investing strategies. Investors should reassess their portfolios, especially if heavily concentrated in riskier segments, and stay patient for better investment opportunities following market corrections.

Takeaways

• 😀 Mr. Shankar Narin warned that 2025 could be the most dangerous year for investors since 2007, due to rising risks in the market.
• 😀 2007 saw a massive market crash, with the Nifty50 index losing over 50%, and Mr. Narin is concerned about a similar correction in 2025.
• 😀 The rapid growth of SIPs (Systematic Investment Plans) in India has led to significant inflows into mid and small-cap stocks, potentially causing inflated valuations.
• 😀 Many investors are chasing returns by investing heavily in mid and small-cap funds, often at the peak of market valuations.
• 😀 SIPs in the wrong products or during peak market times can result in negative returns, as seen between 1995-2002 and 2006-2013.
• 😀 Investors are urged to avoid chasing returns and instead maintain a balanced asset allocation across large, mid, and small caps to mitigate risks.
• 😀 Despite the risks, Mr. Narin highlighted the strength of India's macroeconomic fundamentals, such as solid banking and corporate balance sheets.
• 😀 While investing through SIP for the long term can yield good returns, high valuations in the short-to-medium term could lead to poor performance.
• 😀 If you're already invested in mid and small-cap mutual funds, it may be worth reassessing your portfolio to ensure a more balanced exposure, including large caps.
• 😀 Investors with a long-term horizon, like the speaker, are ready to weather market volatility and continue investing through corrections, as they see opportunities in the long run.
• 😀 Patience and knowledge of market conditions are key for long-term investors, as market corrections often present buying opportunities in undervalued stocks.

Q & A

Why does Mr. Shankar Naren believe 2025 could be a dangerous year for investors?

Mr. Shankar Naren compares 2025 to 2007 due to the risks associated with high market valuations, particularly in mid and small-cap stocks. He highlights that the current market environment, driven by large inflows through SIPs, mirrors some of the conditions that led to the 2007 market crash.

What were the major consequences of the 2007 market crash?

The 2007 market crash saw the Nifty index drop by over 50%, which led to significant losses, especially in mid-cap and small-cap stocks. The correction was brutal at the individual stock level.

What specific risks related to SIPs did Mr. Shankar Naren point out?

He warned that SIPs can yield negative returns if invested in the wrong products at the wrong time. For instance, SIPs in midcaps during the period between 1995-2002 and 2006-2013 returned poorly, highlighting the importance of market timing and long-term investment horizons.

What is the key issue with investors' approach to SIPs in recent years?

Many investors are chasing returns by focusing on mid and small-cap funds, particularly during market peaks. This behavior often leads to investing at inflated valuations, which can result in poor returns in the near-to-medium term.

What data supports the concern about investors chasing returns in the current market?

As of November 30, 2024, 38% of net inflows were directed towards sectoral or thematic funds, while mid-cap and small-cap funds received 9% and 10%, respectively. In contrast, large-cap funds, which represent 66% of India's market cap, only received 12% of inflows, indicating a preference for high-risk, high-reward investments.

How does Mr. Shankar Naren suggest investors should approach asset allocation?

Mr. Naren advises that investors should maintain a balanced asset allocation, including large-cap, mid-cap, and small-cap stocks, rather than concentrating too much on high-risk areas like mid and small caps. This approach can help mitigate risk and provide better long-term returns.

What is the current state of India's macroeconomic environment according to Mr. Shankar Naren?

Mr. Naren believes India's macroeconomic environment is strong, with healthy banking balance sheets, corporate financials, and government policies focused on growth. However, the risk lies primarily in the overvaluation of certain market segments like mid and small-cap stocks.

What does Mr. Shankar Naren mean when he says SIPs should be for the long term?

He emphasizes that SIPs are best suited for long-term investments, ideally spanning 20 years or more. This ensures that investors can ride out market cycles and still benefit from solid returns, even if they invest during a period of high valuations.

What advice does Mr. Shankar Naren give to investors who are concerned about current market valuations?

While he acknowledges the risk of high valuations, Mr. Naren advises investors to continue their SIP investments for the long term, reassess their asset allocations, and consider adding exposure to large-cap stocks if their portfolios are overly focused on mid and small caps.

How should investors handle market corrections according to Mr. Shankar Naren?

During market corrections, Mr. Naren believes investors should view the downturn as an opportunity to accumulate stocks for the long term. Patience and conviction are key to taking advantage of market weaknesses, as corrections often lead to better valuations and opportunities.