Smallcaps set for strong earnings rebound in FY27; Mirae Asset’s Varun Goel names 3 winning themes

Small-cap stocks could be poised for a comeback as earnings growth accelerates after two largely flat years, according to Mirae Asset Mutual Fund’s Varun Goel. He expects a robust recovery in FY27 and sees the strongest opportunities in capital goods, financials and healthcare, while remaining cautious on export-oriented businesses amid an uncertain global growth outlook.

Edited excerpts from a chat:

Mirae Asset Small Cap Fund has outperformed its benchmark since inception despite a volatile small-cap market. Which stock-selection decisions contributed most to the alpha, and were there any calls that materially detracted from performance?
Our focus has been on identifying businesses with robust earnings visibility, prudent balance sheets, and scalable models, the kind that can keep delivering even when the broader environment is tough. Since inception, the fund has compounded at over 16% versus under 9% for the index as of 30th June. We've focused on companies with strong earnings visibility, clean balance sheets and scalable business models across areas like industrial products, financials and healthcare services, and several of these have emerged as genuine compounders.


The portfolio turnover ratio was just 0.26 times as of June. How did you navigate the sharp market swings while maintaining such low churn, and what would prompt you to exit a holding?
Our low churn reflects the fact that we build the portfolio around long-term compounding stories rather than reacting to every swing. With close to 80 stocks in the portfolio, the fund is diversified enough that we don't need to constantly reshuffle. I believe that conviction bets should be given time to play out. Volatility this year gave us opportunities to add to existing convictions rather than replace them.

We'd exit a stock if the earnings visibility weakens, if capital efficiency or governance standards slip, or if leverage creeps up meaningfully. Valuation stretch relative to the growth outlook is the other trigger but the decision is always thesis driven, not sentiment driven.

Financials account for more than 22% of the portfolio when banks, finance and capital-market companies are combined. What is the underlying thesis, and where within financials do you see the strongest earnings visibility?
We remain constructive on the lending and capital-markets ecosystem. We see this playing out across the credit cycle, supported by monetary easing.

Industrial products and electrical equipment together constitute nearly 19% of the fund. With the domestic capex theme now widely owned, are earnings still catching up with valuations or is the risk-reward beginning to narrow?
Industrial products and electrical equipment together account for close to a fifth of the portfolio, and we continue to see a strong opportunity in domestic manufacturing, supported by the government's Make in India push.. In capital goods, we've found businesses tied to power transmission and generation, both thermal and renewable along with data-center-linked plays, which are delivering sustained earnings growth. That said, as the theme has become more widely recognised, we're more selective in stock picking

The fund was almost 97% invested at the end of June, with only around 3% in cash. Why did you remain substantially deployed through the volatility, and under what circumstances would you raise cash meaningfully?
As a fund house, we believe in staying invested fully. Investors trust us with their money to invest and not sit on them. That said smallcap compounding plays out over a 3-5 year horizon, and trying to time entries and exits around short-term volatility usually costs more than it protects.

Where do you see genuine value in small caps today, and which pockets would you avoid? Over the next two to three years, will returns be driven primarily by earnings growth, valuation re-rating or successful stock selection?
Historically, small caps have delivered strong earnings rebound once macro and sentiment-led headwinds ease, and we expect FY27 to be a year of robust earnings growth for small cap companies. India of 2026 has several new sectors and themes with sustained high earnings growth potential. One has to deep dive and identify those themes and names which can deliver sustained high growth.

Currently we are positive on three large themes: toward Capital goods, Financials, and Healthcare. In capital goods, we've found businesses tied to power transmission and generation, both thermal and renewable along with data-center-linked plays, which are delivering sustained earnings growth.

In financials, we like the capital markets space including brokerages, asset managers, depositories, and market infrastructure businesses, which benefit structurally from rising financialization of household savings.

In healthcare, our interest centres on hospitals and diagnostics, where earnings tend to be more secular in nature, supported by the ongoing shift from unorganised to organised care and select CRAMS businesses. We are more cautious on export-oriented businesses, since global growth outlook is uncertain.

The sheer outperformance of small and midcaps have left many surprised even as everyone seems to believe that there’s value in largecaps. How would you explain the run-up in share prices in the broader market?
The overall valuations in the small cap space have moderated in the last two with negligible returns in the benchmark. We expect a strong bounce back in small cap earnings in FY27 after two years of flattish earnings. That should drive the performance of the category. On flows, sustained interest in this segment tends to follow positive long-term performance. Investors have increasingly recognised that small caps can deliver higher earnings growth over the medium to long term.