Stories run the world.

And many in the business of managing other people’s money – the OPM wallahs – understand this very well.

They are currently busy selling two stories.

The first story is that stock prices have fallen as much as they could have, and they won’t fall much further or any further from here.

The trouble here is that almost no OPM wallah told us that stock prices had peaked when they did peak in late September 2024. 

So they did not know when the market top was reached. Given that, how can they possibly now know that the bottom has been reached or is about to be reached? 

It’s as simple as that. 

The second story is that the valuations of large cap stocks are cheap. And cheap valuations essentially mean that these stocks are available for a bargain. 

But are they?

The price-to-earnings ratio data for the thirty stocks that make up the BSE Sensex – India’s most popular stock market index – are available from 1991 onwards. 

The mean price to earnings ratio over this period is 21.6. The median is 20.5. The price to earnings ratio of the Sensex as of October 12, 2026, stood at 19.1, which is lower than both the long-term mean and median.

So yes, valuations of large cap stocks are lower than the long-term average, but they aren’t exactly a steal, as many OPM wallahs are making them out to be. 

Also, Sensex valuations have fallen because IT stocks that are part of the index have taken a beating over the last year, with Tech Mahindra being the only exception, having risen by 6.4% during the period.

Now, the impact that artificial intelligence will end up having on the business model of IT companies is still not clear.

Further, the price of HDFC Bank – which has the largest weightage in the index – has fallen 27% in the last one year.  

Given this, there is a case for investing in large-cap stocks, but it is difficult to argue that they are cheap as a whole, given that the Sensex valuation has been dragged down by IT companies and private banks, and it isn’t significantly lower than long-term valuations.

Of course, to give them the benefit of doubt, many OPM wallahs aren’t allowed to recommend specific stocks and end up speaking in fairly general terms.

The funny thing is that the retail crowd in general seems to be giving the “cheaper” large caps story a miss and piling on to small-cap stocks.

In September 2026, the net inflows into small-cap mutual fund schemes stood at ₹90.4 billion. Small-cap mutual funds are mandated to invest a bulk of the money they collect into small-cap stocks.

In comparison, the net inflows into large-cap mutual fund schemes stood at just ₹8.6 billion, less than a tenth of the net inflows into small-cap mutual funds. Large-cap mutual funds are mandated to invest a bulk of the money they collect into large-cap stocks.

From April to September 2026, the small-cap mutual funds have seen a net inflow of ₹422.1 billion whereas large-cap mutual funds have got ₹45.7 billion.

Of the ₹422.1 billion that has flown into small-cap mutual funds since April 2026, ₹247.8 billion has come in the last three months.

This is a clear case of retail investors chasing performance or what I refer to as the reverse law of demand. 

Pithily put, the law of demand states that when prices are low, the demand is high. The reverse law of demand works in case of investment assets, where demand starts to go up after prices have already gone up.

Or as Jeremy Grantham writes with Edward Chancellor in The Making of a Permabear – The Perils of Long-Term Investing in a Short-Term World: “Most people like to invest when prices are going up: it’s like buying sweaters when they are on anti-sale.”

Between end of March 2026 and end of June 2026, the BSE SmallCap Index went up 29.1%. After this, there has been a deluge of money flowing into small-cap funds, but the index has gone up only 2% between end June 2026 and October 12, 2026. 

This isn’t surprising given that as money keeps coming into small-cap mutual funds it becomes increasingly difficult for the fund managers to deploy that money well. 

As Grantham and Chancellor write: “Size of assets under management is the ultimate barrier to successful investing… The basic truth is that as you add assets, you have three disagreeable alternatives. You can either add more stocks or buy more of the original list, or both.”

The point is that the more stocks a fund manager adds to a portfolio, the harder it becomes to maintain quality. The best ideas are scarce. Beyond a point, the manager has to settle for increasingly mediocre stocks or sometimes even bad stocks, simply to expand the portfolio.

If you don’t believe me, then just look at the number of stocks some of the small-cap mutual funds hold. Some hold more than 250 stocks. 

While the OPM wallahs love to talk about the conviction they have for their investing ideas, this is a clear case of spray and pray. How can a fund manager know about more than 250 companies? Even with the help of a team. 

It’s interesting to see that as of September 2026, close to 41% of the assets under management of equity mutual funds were in small-cap mutual funds, mid-cap mutual funds and thematic/sectoral mutual funds. 

Retail investors are taking on more risk in the hope of earning higher returns. The trouble is that the valuations of small cap stocks as a whole – as measured by the BSE SmallCap Index – are currently more or less similar to where they were when the index had reached a then all-time closing high in December 2024. (The price to earnings ratio as of October 12, 2026 was 33.5 against 34.7 as of December 11, 2024.)

This means that small-cap companies need to deliver very strong earnings growth to justify investing in them broadly.

Or as Grantham and Chancellor write: “If the assets you bought got pushed up in price simply because they were in favor with investors, then you are not going to be rewarded for taking a risk; you are going to be punished for it.”

Taking on more risk doesn’t automatically mean earning higher returns – if it did, it wouldn’t be called risk to begin with. 

So that brings us back to the OPM wallahs. While they may be speaking up for what they think are heavily battered large caps, most haven’t uttered a word on the huge inflow of money into small-cap mutual funds, and the fact that retail investors are taking on much more risk than they actually should. 

This is totally understandable given that the main job of the OPM wallahs is to ensure that money keeps flowing into the schemes that they manage. If money isn’t coming into large-cap schemes, it’s at least coming into small-cap ones. At the aggregate level it doesn’t matter for them. 

And so, the summer continues for the OPM wallahs. 

As long as retail investors remain in la-la land, overpaying, as Grantham and Chancellor put it “for excitement or sex appeal,” and believing that stocks will continue to go up because they have gone up in the recent past, there is little reason for the music to stop. The day they wake up, though, the weather could change rather quickly. 

Or as the great Don DeLillo puts it in Underworld: “When you deal with crowds, nothing’s predictable.”