Midcap, smallcap stocks: Daljeeht Kohli reveals strategy to find alpha beyond large caps

Market veteran Daljit Kohli has made his investment playbook clear ahead of launching his portfolio management strategy: the real opportunity for outperformance lies beyond India’s crowded large-cap universe. In his view, alpha is far more likely to be generated in mid- and small-cap stocks, where sectoral breadth, business diversity and stock-specific opportunities remain significantly underappreciated.

The case against crowded large caps
Kohli’s argument is blunt. “If you go for a very large-cap dominated one, what is the differentiation you are bringing to the table? There is no differentiation,” he said, underscoring how the biggest names are already widely tracked and efficiently discovered by the market.

That leaves little room for a portfolio manager to create an edge. He also pointed to the concentration risk embedded in headline indices, where banking, financials and autos dominate, making large-cap portfolios look increasingly similar across managers.

Why the broader market matters
For Kohli, the investment universe becomes far more compelling once one moves beyond the top 100-150 companies. “You have a wide variety to choose,” he said, adding that the broader market offers a “huge spectrum” of old-economy businesses, new-age companies and firms undergoing transition.

That breadth, he suggested, is critical for active management. It allows investors to identify niche leaders, emerging business models and under-owned companies that can deliver earnings surprises even when benchmark indices remain sluggish.

Basket approach within sectors
One of the more striking parts of Kohli’s framework is his preference for building sector-specific baskets rather than simply owning the most obvious market leaders. In pharmaceuticals, for instance, he said investors need not be confined to frontline giants. “It is not necessary that I have to go with Sun Pharma,” he said.

Instead, a portfolio can combine a CDMO player, a domestic pharma company, an international-facing exporter, an API maker and even a multinational drug firm. That approach spreads risk while preserving exposure to multiple earnings triggers within the same sector.

Stock-picking over top-down calls
The broader message fits with Kohli’s larger market stance from the conversation: in a volatile macro environment marked by rate hikes, pressure on headline indices and uneven sector performance, bottom-up stock selection matters more than broad market calls. India, he argued elsewhere in the discussion, remains a stock-picker’s market because dispersion within sectors and indices is unusually high.

For investors, that means the next phase of wealth creation may not come from simply owning benchmark heavyweights. It may come from identifying the right businesses in the broader market — precisely where Kohli believes flexibility, differentiation and alpha still exist.