Edited excerpts from a chat with Rupesh Patel, Senior Fund Manager – Equity Investments, Nippon India Mutual Fund:

Your Nippon India Growth Mid Cap Fund delivered a strong 22% over the last 5 years, beating the benchmark. But given your Growth at Reasonable Price (GARP) philosophy, where are you actually finding “reasonable” valuations in a midcap market that many currently see as overheated?

On an aggregate basis, the NSE Midcap 150 index has remained almost flat since September 2024. However, during this period, earnings have grown at a reasonable rate. In fact, midcap as a category has been the most resilient and delivered higher growth compared to other segments of the market. As a result, valuations today, though they appear higher compared to long-term averages, have corrected as compared to where we were in September 2024.

Coming to Nippon India Growth Fund, we follow a bottom-up approach to construct the portfolio and buy stocks based on their relative attractiveness on risk-reward equation. Some of the businesses in the category may appear expensive in the near term; however, the size of the opportunity and their ability to maintain earnings growth at a reasonable rate over the long term make them attractive from a medium to longer-term perspective.

You are overweight financials and underweight technology in the midcap fund. What’s the rationale? How do you think midcap lenders and midcap IT companies are placed at this stage?

Our OW stance on financials is on account of our exposure to lenders as well as other beneficiaries of financialization of savings like Life Insurance companies, asset management companies, Exchanges, etc.

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On the lending side, most of our exposure is to well-capitalised lenders where asset quality is largely expected to hold, Return on Assets/ Return on Equity remains healthy, and valuations are reasonable in the context of the overall market.
In IT companies, we have been underweight since the last few quarters, largely owing to the risk of a slowdown in earnings growth on account of current geopolitical uncertainties and the impact of disruptions like AI. Valuations were also a concern till a few quarters back. Going ahead, as the dust settles and some of these companies evolve and adapt to new realities, growth will recover from current lows. Companies in this sector are generally capital efficient and generate free cash flow, making them attractive bets again as valuations turn favourable.Within the midcap space, how do you read the Q4 earnings season? What are your biggest takeaways for investors?

Q4 earnings season for midcaps has turned out to be quite resilient, and most companies are delivering on expectations. However, going ahead, risks related to deterioration in the macro environment, cost inflation, and logistics remain relevant. If current geopolitical uncertainties continue, we must be cognizant of these risks and their impact on earnings and valuations.

Given the growth trajectory, valuations and earnings, midcap companies are in a sweet spot. Would you agree?

If we look at the last few quarters, midcap companies’ earnings have remained resilient. Most of them have delivered healthy earnings growth even in Q4, FY’26. However, aggregate returns of midcap companies as represented by the NSE Midcap 150 index have remained flat since September 2024, resulting in a valuation correction over this period.

Further, midcap is a very diverse category with a universe representing multiple sectors and some unique and fast-growing profit pools that have the potential to grow meaningfully over the medium to long term; hence, on a bottom-up basis as well, opportunities exist in this segment of the market.

How have you been reshuffling your portfolio to realign it with the realities of war?

As mentioned earlier, we remain cognizant of risks arising on account of deteriorating macro conditions, inflation in costs and logistical challenges, if current geopolitical uncertainties persist. We also remain aware of the potential impact of these risks not only on earnings growth but also on market valuations. In some instances, current stock prices may already be reflecting risks of these uncertainties, making the risk-reward favourable. Hence, our approach is to remain aware of valuations and avoid vulnerable businesses.

From a 3-5 year perspective, which sectors do you think are best placed at this stage – both from a growth as well as a valuation perspective?

We remain positive on Financials, Consumer Discretionary, and select industrials.

Within financials, we are positive on lenders as well as companies that benefit from a bigger trend on the financialization of savings. Accordingly, we have exposure to companies in the insurance space, Asset Management Companies, Exchanges and other financial services companies. On lenders, asset quality remains benign, they are well capitalised, generate decent Return on Assets (RoA) and Return on Equity (RoE) and valuations are reasonable.

Consumer discretionary companies are likely to benefit from favourable demographics, growth in per capita incomes and trends on premiumization playing out in multiple categories over the medium to long term.

On the industrial front, the reason to be positive is on account of various initiatives taken by the government to encourage manufacturing in India. Select companies in Auto ancillaries, Electronics manufacturing, precision engineering and defence-related segments can also do well. However, these are broad sectors, and winners will have to be picked on a bottom-up basis, considering factors like their manufacturing prowess, management strength and cost competitiveness.

The midcap index has already hit a new peak this month, ahead of both small and largecaps. What’s the reason behind this optimism, and do you see valuation risk building?

Although the midcap index is close to an all-time high, its last 20 months’ returns have been flat despite midcap companies as an aggregate delivering superior growth. In that sense, valuations today have turned favourable on account of this time correction. Even if we look at the last 3 years’ earnings on a CAGR basis, midcap as a category has reported superior earnings growth as compared to broader markets. Going ahead as well, the outlook on midcap companies’ earnings growth continues to remain healthier. In that sense, the performance of the midcap index is largely a reflection of underlying earnings growth.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times.)

Over the past two months, 14 penny stocks have witnessed sharp corrections, declining between 15% and 55%. These underperformers were identified through a screen that focused on stocks with a market capitalisation below Rs 1,000 crore, a share price under Rs 20, and a minimum recent trading volume of 5 lakh shares. The screen highlights low-priced, relatively liquid penny stocks that have come under significant selling pressure during the period. (Data source: ACE Equity)

Although penny stocks often attract investors with their low entry prices and potential for rapid gains, they come with substantial risks. Due to low liquidity, high volatility and limited transparency, they are prone to manipulation and sudden price drops. Without a clear strategy and strong risk controls, investors may face more losses than gains.

With this, the total outflow by Foreign Portfolio Investors (FPIs) from the equity market has reached Rs 2.25 lakh crore in 2026, which is higher than the Rs 1.66 lakh crore pulled out during the entire 2025, according to data with the NSDL.

FPIs were net sellers in all months of 2026, except February. They withdrew Rs 35,962 crore in January before turning net buyers in February, when they invested Rs 22,615 crore, the highest monthly inflow in 17 months.

However, the trend reversed in March, when foreign investors pulled out a record Rs 1.17 lakh crore. The selling continued in April with net outflows of Rs 60,847 crore and extended into May with withdrawals of nearly Rs 33,000 crore.

FPIs have been selling Indian equities due to a combination of weak earnings growth, rupee depreciation and more attractive opportunities in other markets, market experts said. However, the pace of selling has been moderated.

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Geojit Investments Chief Investment Strategist V K Vijayakumar said subdued earnings growth in India, compared with significantly stronger corporate performance in markets such as the US, Japan, South Korea and Taiwan, has prompted FPIs to shift capital overseas.
“The strong artificial intelligence-led rally in markets such as South Korea and Taiwan has also attracted foreign capital away from India,” Vijayakumar said.Sachin Jasuja, Head of Equities and Founding Partner at Centricity WealthTech, said the persistent depreciation of the rupee has emerged as another key factor behind FPI outflows.

“The rupee has weakened nearly 6 per cent so far in 2026 and around 10 per cent over the past year, falling from the mid-80s to about 95.5 against the US dollar despite RBI’s efforts to defend the currency,” he said.

Jasuja noted that India’s heavy dependence on crude oil imports has further aggravated concerns. With the country importing more than 80 per cent of its crude requirements, the sharp rise in Brent crude prices from the USD 70 per barrel range to USD 95-105 amid disruptions around the Strait of Hormuz has widened both the import bill and the current account deficit.

“A weaker rupee directly impacts dollar-denominated returns for foreign investors, making it one of the biggest reasons for continued FPI selling,” he said.

The pace of selling has been moderated in May compared to previous months.

Himanshu Srivastava, Principal – Manager Research at Morningstar Investment Research India, said moderation in outflows suggests that foreign investors are becoming less aggressive in reducing their India exposure compared with the heavy selling witnessed earlier in the year.

” One of the key reasons behind this trend has been the gradual improvement in global risk sentiment. Concerns around global trade tensions, tariff-related developments, and growth uncertainties, while still present, have eased somewhat from the elevated levels seen a few months ago,” he added.

On the outlook, Jasuja said a reversal in FPI flows is unlikely in the near term unless there is a significant improvement in macroeconomic conditions.