Nilesh Shah's Investment Advice: How to Invest Rs 10 Lakh in 2026, Considering Smallcap vs. Midcap, Gold, and Silver

With smallcap stocks undergoing corrections, increased scrutiny of valuations, and a surge in silver prices, asset allocation strategies are once again a primary focus for investors. Nilesh Shah, Managing Director of Kotak Mahindra AMC, provides a grounded investment plan for 2026. His framework balances investments across equities, gold, silver, and debt, acknowledging the market's shifting cycles.

Shah's approach prioritizes companies demonstrating clear earnings potential, comfortable valuations, and strong risk management, moving away from purely speculative investments as market sanity returns following periods of excessive hype.

**Smallcap Recoveries and Growth Expectations**

In a discussion, Shah addressed the significant drop seen in many small and midcap stocks this year—some falling by as much as 40-50%—and their continued lag behind the market's overall recovery. He spoke about the likelihood of these stocks rebounding by 2026.

Shah noted that investors often have inflated expectations for smallcap companies, anticipating continuous rapid growth. He cautioned that it's unrealistic to expect a smallcap to maintain a 50% growth rate indefinitely due to its increasing size. He also pointed out that many smallcap companies lack a substantial track record, leading to investments based on hope rather than fundamentals. While businesses with solid foundations will likely recover, those driven by speculative trading should be re-evaluated, with potential losses cut.

Shah believes the current correction is distinguishing strong businesses from weaker ones. Companies making sound decisions to foster growth and working to meet revised expectations are poised to thrive.

**Market Sanity and Investment Approaches**

Recalling a time when his cousins were offering stock tips during the peak of the bull market, Shah was asked about the current situation and whether he was now the one dispensing advice. He joked that the only tip he could offer was to invest in his mutual fund. He noted a shift in attitude, with his cousins now expressing a desire for long-term investment rather than short-term trading, signaling a return to more rational investment behavior.

**Asset Allocation for 2026: A Balanced Approach**

When asked about how a moderately conservative investor should allocate Rs 10 lakh in 2026 across gold, silver, equities, and debt, Shah suggested a multi-asset allocation fund as a suitable example. Currently, such a fund might hold approximately 55% in equity, 20% in precious metals, and 30% in fixed income, with slight variations possible. He considers this a reasonable allocation for an investor with average risk tolerance.

While the 20% allocation to precious metals is higher than the 10% previously recommended, Shah emphasized that this is their current outlook, subject to continuous monitoring of prices and central bank actions. He likened it to a professional driver operating a car at a higher speed, advising average investors to maintain a more cautious pace.

**Equity Preferences: Midcaps Lead the Way**

Explaining the preference for midcaps over largecaps and smallcaps, Shah cited a combination of earnings growth and valuation considerations. While smallcaps may offer higher earnings growth than largecaps, their valuations are significantly higher. Midcaps, on the other hand, provide higher earnings growth than largecaps with comparable valuations.

Shah stated that largecaps are currently trading around their historical averages, with earnings growth largely factored into their prices. While not undervalued enough to warrant an overweight position, they are reasonably priced for a neutral stance.

**Smallcap Valuations: Froth Remains in Pockets**

Despite recent corrections, Shah believes that some froth remains in certain smallcap stocks. He cautioned that valuations are high and may not be supported by future earnings growth. The concentration of floating stocks in a few hands contributes to these elevated valuations, and any liquidation of these holdings could lead to price corrections.

**IPO Market: Proceed with Caution**

Regarding the strong IPO pipeline observed in 2025, Shah acknowledged signs of euphoria but advised selective participation. While some IPOs represent genuine businesses, their valuations may be excessive, leading Kotak Mahindra AMC to skip them. He also recognized that others might view some of their investments as overpriced, highlighting the subjective nature of valuation. Shah stressed the importance of thorough research and the freedom to avoid unsuitable IPOs, allowing market forces to determine prices.

**Reforming the IPO Market**

Addressing the increasing reliance on Grey Market Premium (GMP) as an indicator for IPO investments, Shah suggested reforms to enhance the integrity of the IPO market. He proposed extending the anchor investor allotment period to 30 days before the IPO, with a one-year lock-in period to encourage serious, long-term investors. Additionally, he suggested formalizing the grey market into a "when-issued" market to facilitate transparent price discovery for both issuers and investors.