Earnings & fundamentals are beginning to matter again: Vaibhav Chugh, Abakkus MF

The biggest opportunity for a fund house to differentiate itself lies in the strength of its investment philosophy, people, and processes, Chugh said.

As investors hunt for bargains and investment themes in the markets, Mumbai-based Vaibhav Chugh, chief executive officer at Abakkus Mutual Fund, told Puneet Wadhwa in an email interview that specialised investment funds (SIFs) could play an increasingly important role in portfolio construction. Their success, he said, will ultimately depend on the quality of the strategies, disciplined risk management and their ability to deliver across market cycles. Edited excerpts:

 

With domestic institutional flows remaining strong and retail participation high, do you worry that India's market is becoming increasingly liquidity-driven rather than valuation-driven?

 

I would not characterise the market as being purely liquidity-driven. The strength of domestic flows also reflects growing confidence in India’s long-term economic prospects. At the same time, there are pockets of the market, particularly in the mid-cap and small-cap segments, where valuations appear to have moved ahead of underlying fundamentals. In these areas, liquidity has clearly had a greater influence on prices.

 

 

Ultimately, however, liquidity can support valuations only to a point. Over the long term, earnings growth, cash flows and the quality of the underlying business determine sustainable valuations and returns. So, while liquidity is certainly amplifying market momentum today, valuation discipline remains important. In the long run, fundamentals will continue to matter most.

 

Where do you see the biggest opportunity for the fund house to differentiate itself in an increasingly crowded mutual fund market? 

 

The mutual fund industry is undoubtedly becoming more competitive, but it is also growing rapidly. In my view, the biggest opportunity for a fund house to differentiate itself lies in the strength of its investment philosophy, people, and processes. 

 

Products can be replicated, but a strong investment culture, disciplined research framework, and robust risk management are much harder to build. An experienced investment team that can identify opportunities early and navigate market cycles consistently is a key competitive advantage.

 

Communication is another important differentiator. Investors today expect greater transparency and clarity. Fund houses that can clearly explain what they own, why they own it, and how they are managing risk are more likely to earn long-term trust from both investors and distribution partners. 

 

Is consolidation on the cards?

 

I do not see it as an immediate necessity. The industry is expanding fast enough to support multiple players with distinct strengths and offerings. I believe there is still ample room for well-managed AMCs to grow by delivering consistent performance, strong service, and a differentiated investment approach.

 

What would make you materially more bullish—or bearish—on Indian equities over the next 12–18 months?

 

Earnings and fundamentals are beginning to matter again. Over the next 12–18 months, we would become more bullish if earnings growth broadens, private-sector capex strengthens and foreign flows recover without valuations becoming excessive. We would become more cautious if valuations become stretched again, or global and geopolitical risks result in sustained foreign investors outflows. 

 

Do you see SIFs genuinely disrupting the investor market, or will they largely become another product category alongside PMS and mutual funds?

 

SIFs address a genuine gap between mutual funds and PMS. They offer greater flexibility than traditional mutual funds while remaining more accessible than PMS, making them relevant for investors looking for differentiated strategies within a regulated framework.

 

SIFs are more likely to become an integral part of investor portfolios rather than disrupt or replace existing products. Mutual funds, PMS and SIFs each serve different investor needs and can comfortably coexist. The real value of SIFs lies in their ability to use a wider range of strategies with the aim of improving risk-adjusted returns and providing better portfolio diversification.

 

Over time, as investors become more sophisticated and look beyond traditional long-only products, SIFs could play an increasingly important role in portfolio construction. Their success will ultimately depend on the quality of the strategies, disciplined risk management and their ability to deliver across market cycles.

 

What's your view on the mid-and small caps (SMIDs)? Where do you still see genuine earnings-value mismatches?

 

The earnings numbers reported so far have been encouraging, especially given that expectations had come down after the West Asia crisis. Corporate India has shown much better resilience than expected. Nifty companies are seeing double-digit earnings growth, while the mid- and small-cap space could see high double-digit growth.

 

At an overall level, mid-and small-caps may look fairly valued, but when you go stock by stock, there are still enough opportunities. Markets have increasingly become bottom-up, and this is particularly true in the SMID space. It is also a much wider universe, with several new businesses, emerging themes and companies with significant room to grow.

 

For us, valuation is not simply about whether a stock looks expensive or cheap on a multiple. It has to be seen in the context of the growth opportunity, scalability of the business and its ability to generate cash flows. That is why stock selection becomes very important in this space. Identifying businesses where the valuation does not fully reflect the underlying growth and earnings potential is key, and this is where an experienced investment team with a strong bottom-up research process can make a difference. 

 

AI, manufacturing, defence, power, and infrastructure are attracting significant investor attention and capital. Which of these themes have genuine structural earnings potential, and which are at risk of becoming valuation bubbles?

 

We see manufacturing, defence, power and infrastructure as genuine structural themes, supported by a multi-year capex cycle, localisation, indigenisation, rising power demand and strong order visibility. Defence, for instance, continues to benefit from higher capital allocation and increasing domestic procurement.

 

However, a strong theme does not necessarily mean every stock within it is attractive. In some pockets, particularly defence and newer AI-related businesses, valuations may already be factoring in several years of strong growth. The key is whether earnings and cash flows can eventually justify those expectations. In defence, execution capacity is also becoming an important consideration given the size of existing order books.

 

So, while we remain positive on these themes structurally, we would be increasingly selective at the stock level. This is where an experienced investment team with strong research capabilities can help identify businesses where the long-term opportunity is not yet fully reflected in valuations.