Small-cap funds see strong inflows: Groww AMC identifies 4 sectors with long-term growth potential

As small-cap funds continue to attract strong investor inflows, sectors delivering high growth are unlikely to look inexpensive from a traditional value-investing perspective, according to Anupam Tiwari, head of equities at Groww AMC.

Valuations have climbed considerably over the past 12 to 18 months. Tiwari said investor interest in small caps was muted when Groww advocated the segment more than a year ago, but sentiment has since shifted significantly.

“The Q1 earnings numbers played a key role here. Retail behaviour often follows past performance. Just as we witnessed the recent rush into gold funds, investors are now moving aggressively into small caps because of their recent returns,” Tiwari told Mint .

However, he cautioned that small-caps remain a highly volatile investment category. Investors should therefore maintain a long-term horizon of at least eight to 10 years to potentially generate sustainable returns and a healthy CAGR.

Tiwari said Groww’s stock-selection framework is built around the QGAR philosophy, which focuses on quality, growth and reasonable valuations.

“We view the market as a multi-factor, complex and evolving system, where standard textbook formulas often break down. For instance, despite US interest rates rising over the past five years, equity valuations expanded instead of contracting,” he said.

Groww evaluates business cycles, management quality and growth visibility over a 12-to-24-month period. At the same time, it maintains sectoral diversification to help manage portfolio risks.

In efficient markets, high-growth sectors rarely trade at valuations that appear cheap on a pure value basis. Instead, investors should assess whether the underlying growth can remain durable over two, five or seven years. The answer can determine whether a stock eventually re-rates or de-rates.

Groww is taking calculated growth exposure across four sectors that it expects to benefit from long-term expansion.

1. Consumption: Rising per-capita income in India and changing spending patterns among younger consumers are supporting demand for branded and premium products, creating opportunities across the broader consumption ecosystem.

2. Manufacturing: Manufacturing activity has regained momentum following tariff adjustments in important export markets such as the US. Although India cannot match China in mass-scale production or cost of capital, niche Indian exporters have considerable room to expand.

3. Capital markets, NBFCs and banks: Groww remains optimistic about the long-term prospects of capital markets, NBFCs and other non-lending financial businesses. Traditional banks are also becoming more attractive after valuation corrections and improving corporate credit growth, supported by capex-driven borrowing.

4. Power transmission and distribution: Groww expects multi-year expansion in the grid and transmission ecosystem, both in India and international markets.

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