“Midcaps are poised to outperform large and small caps, though the margin of outperformance may remain narrow,” says Nilesh Shah, managing director, Kotak Mahindra Mutual Fund.
The fund house believes in 2026-27, earnings growth should drive equity returns, potentially drawing in overseas funds, too.
The return of overseas funds to Mumbai’s secondary markets should boost liquidity. Fund managers expect the midcap index to deliver an earnings growth of 14-15% in the year 2026-27, slightly higher than the large cap index of 12%.
Fund managers believe small caps are the most expensive, with the Nifty Small cap 100 trading at a PE of 29.2, a huge premium of 43% to its 10-year average of 16.7.
In comparison, the midcap 100 trades at a PE of 25.1, a premium of 8% to its 10-year average of 23.1, while the Nifty 50 trades at a PE of 21.5, a 3.3% premium to its 10 year average of 20.8.
In the mid-cap space, the fund house expects themes such as financial services , ecommerce, healthcare and consumption to outperform and generate alpha within portfolios.
Despite the sharp run-up in gold and silver prices over the last one year, Kotak has asked investors to maintain a 10% allocation to precious metals, given the global uncertainty and central bank gold purchases. With evolving market conditions, fixed income is set to play a meaningful role in portfolios by adding stability and helping manage risk.
The likelihood of inclusion for Indian sovereign debt in the Bloomberg Global Aggregate Index has also strengthened the outlook on bonds. With a formal decision expected in January, India’s sovereign bonds could see potential inflows of around $25 billion. On rates, the fund house expects one last rate cut of 25 basis points by March in the current cycle, followed by a long pause until December 2027.