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Amid a recent smallcap correction, increased scrutiny of valuations, and a surge in silver prices, strategic asset allocation is once again taking center stage for investors. Nilesh Shah, Managing Director of Kotak Mahindra AMC, is advocating for a pragmatic investment approach heading into 2026, balancing equities, gold, silver, and debt in response to evolving market dynamics. His strategy prioritizes earnings visibility, valuation comfort, and risk management over chasing speculative returns, especially as overheated segments of the market cool down.
Smallcap Correction: Separating Substance from Speculation
This year has witnessed meaningful declines in many small and midcap stocks, with some falling as much as 40-50%, even as the broader market has reached all-time highs. the question of whether these stocks will recover in 2026 is a key concern for investors.
Shah cautions against overly optimistic expectations,noting that rapid growth rates are often unsustainable. “Many times peopel end up having much higher expectations as they have delivered stupendous growth in a short period of time,” he explained,signals a return to sanity in the market.
A Pragmatic Asset Allocation for 2026
For a moderately conservative investor with Rs 10 lakh to invest in 2026, Shah recommends a diversified portfolio with a positive outlook on equities, gold, and silver. He anticipates midcap stocks will outperform largecaps and smallcaps, while favoring gold over silver in the precious metals space.
His current multiasset allocation fund serves as a model, with approximately 55% allocated to equities, 20% to precious metals, and 30% to fixed income.while these percentages may fluctuate slightly, he considers this a reasonable allocation for an average risk taker. The 20% allocation to precious metals represents an increase from the 10% previously discussed a few years ago, a move he attributes to ongoing monitoring of prices and central bank activity. “For an average investor, it is indeed like a car where the professional driver can drive at 120. But if you come to my training institute saying at what speed I drive, I will say 60. Do not go to 120.”
Midcaps Lead, But Caution Remains in Smallcaps
Shah’s preference for midcaps stems from their combination of earnings growth and reasonable valuations.While smallcaps may exhibit higher earnings growth, their valuations are significantly elevated. Largecap stocks, he notes, are currently trading around past averages, with earnings growth largely factored into their prices.
Despite the recent correction, Shah cautions that some froth remains in the smallcap segment. “Valuations are high and earnings growth will not be able to meet those valuation expectations,” he warned.He also pointed to concentrated ownership in many smallcap stocks as a contributing factor to inflated valuations, suggesting that price revelation will occur if these concentrated holdings are liquidated. .
IPO Market: A Mixed Bag
The strong IPO pipeline of 2025 presents both opportunities and risks. Shah acknowledges a degree of euphoria, noting that some IPOs are priced aggressively despite solid underlying businesses. His firm has selectively skipped overvalued IPOs,while also facing criticism for investing in highly-priced offerings. “Beauty is in the eye of the beholder,” he said, emphasizing the importance of thorough research.
Reforming the IPO Process
Shah also addressed concerns surrounding the role of the gray Market Premium (GMP) in IPO investments, where investors seek fast listing day gains. he proposed several regulatory reforms, including extending the anchor allotment period to 30 days before the IPO to attract more serious investors and increasing the lock-in period for anchor investors from three months to one year. He also suggested formalizing the grey market by creating a “when-issued market” to facilitate price discovery. “So, we need to carry out some reforms to ensure that our IPO market retains its vibrancy.”
