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Rather than broad-based valuation rerating, fund managers believe the next leg of returns will be shaped by fundamental earnings traction, disciplined asset allocation and realistic investor expectations.
Speaking at the Business Standard BFSI Insight Summit 2025, chief investment officers (CIOs) from the country’s largest asset management companies (AMCs) said investors should prepare for a moderate-return environment. They must also avoid chasing pockets of excess and adopt time-tested investment behaviour as markets transition into a more stable phase.
The panel comprised Sankaran Naren, CIO, ICICI Prudential Mutual Fund; Mahesh Patil, CIO, Aditya Birla Sun Life Mutual Fund; Sailesh Raj Bhan, CIO – Equity, Nippon India Mutual Fund; Rajeev Thakkar, CIO, PPFAS Mutual Fund; and Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund.
The CIOs pointed out that market breadth has improved, supply of new equity paper has risen, and several excesses — particularly in smaller market segments — have begun to unwind. Largecap valuations have also moderated to more reasonable levels, aided by an improving macroeconomic backdrop and early signs of an earnings recovery.
They noted that macro indicators have turned distinctly more favourable. Inflation has eased, liquidity conditions have improved and monetary policy is shifting from restrictive to accommodative. Consumption — subdued for an extended period — is beginning to stabilise, supported by goods and services tax (GST) rate cuts and higher government spending. Corporate earnings, which grew only in mid-single digits over the past four quarters, are expected to strengthen as these tailwinds take effect.
Conditions in fixed income have also brightened. With inflation anchored near the Reserve Bank of India’s (RBI’s) target and short-term rates easing, debt valuations look more attractive than they have in several years. However, taxation changes continue to divert a large share of flows towards hybrid and asset-allocation products rather than pure debt funds.
The panellists also cautioned that the current cycle places far greater responsibility on investors themselves.
Unlike the previous capex cycle, when banks bore the bulk of capital-allocation risks, today much of the fresh capital is being deployed through mutual funds (MFs), portfolio management services (PMS) and alternative investment funds (AIFs).
This shift, they said, makes it essential for investors to better understand risk, diversify prudently, and build portfolios capable of withstanding intermittent volatility. Edited excerpts:
Some fund managers have been cautioning investors last year when markets were at their peak. Now that we have seen a 13-14-month consolidation and India has starkly underperformed global peers, should investors turn constructive on equities or remain guarded?
Naren: India has significantly underperformed almost every major global market over the past 12-14 months. Earlier, the belief was that India was expensive while many other markets were attractively valued. But today, when we look across the world, virtually every major market appears overvalued to some degree. It no longer seems plausible that India can continue to lag while global markets, particularly the US, keep delivering stellar returns.
Our view now is that if the US continues to do well, India should also participate. A repeat of last year — where US markets surged but India delivered muted returns — is unlikely.
Yet at some stage, global markets, especially the US, should correct. Valuations in several artificial-intelligence (AI)-driven companies have reached extreme levels. Trillion-dollar, four-trillion-dollar, even five-trillion-dollar market caps (mcaps) are hard to justify on fundamentals. Eventually, these stocks should lead a correction.
Even in that environment, India should remain relatively resilient. Our stance last year was more cautious due to elevated valuations and overheated sentiment. Today, while we still advocate disciplined asset allocation; we are more constructive than we were a year ago. India’s macro backdrop remains strong, and the long-term growth narrative is intact.
Investors have also realised that making quick gains in secondary markets is difficult. Except for some enthusiasm in the primary market, the earlier exuberance has faded. Overall, we think the market is on firmer ground today. But we continue to emphasise that this is not an environment for outsized returns. Investors should expect moderate but more stable performance compared to last year.
Many investors entered the markets expecting outsized gains and have been disappointed. Was this 13-14-month consolidation essential? Has it helped in recalibrating expectations?
Raj Bhan: Expectations, in reality, have not adjusted meaningfully. When we interact with investors, it is clear that return aspirations remain elevated. This is partly because global markets — especially the US — have delivered strong performance, and many Indian investors feel they have missed out. So, excess capital and euphoric sentiment tend to migrate rather than disappear.
Domestically, markets have become more rational, particularly in largecaps, where earnings rather than sentiment are driving returns. Earnings momentum should gradually improve, which bodes well for long-term investors. However, while listed markets have become more sensible, exuberance has shifted to private markets and the primary market, where valuations often exceed those of established listed peers.
On a comparative basis, India has substantially underperformed global markets over the past year. The MSCI Emerging Markets Index — heavily influenced by China and South Korea — is up 25-30 per cent. In contrast, India has been broadly flat in dollar terms. Expectations need to move to more realistic levels. Future returns will be led primarily by earnings, not sentiment.
What has triggered India’s underperformance? Do relative valuations now appear more reasonable compared to global peers?
Patil: A year ago, India was among the best-performing markets globally, and valuations were significantly higher than most emerging markets. India’s valuation premium had reached a 10-year high around 18 months ago. The premium was justified because India was delivering superior earnings growth.
However, that dynamic reversed. Earnings growth slowed sharply — mid-single digits over the last four quarters compared to nearly three years of high-teens growth earlier. Naturally, slowdown in earnings weighs on market performance.
At the same time, fiscal spending dipped temporarily due to elections, monetary policy stayed restrictive despite slowing growth, and trade policy uncertainties added pressure. Even the rupee, traditionally resilient, came under stress.
But many of these headwinds are now easing. Fiscal stimulus, GST rate cuts and measures to revive consumption should support growth. Monetary policy has turned accommodative, liquidity has improved and the RBI has been proactive in supporting credit conditions. We have already seen rate cuts, and further easing is possible.
Earnings should return to double-digit growth, and valuations have corrected to more reasonable levels both absolutely and relative to peers. With the trade deal now moving in the right direction, the next critical piece is a revival in private sector capital expenditure, which could materialise once there is clarity on the trade framework.
How do you assess valuations and growth trends now?
Thakkar: Markets have moved sideways for 12-15 months. Earnings growth, though modest, is stronger than a year ago. But in some areas — particularly newly listed multinational subsidiaries — valuations are difficult to justify. An Indian arm contributing a small portion of global revenues being valued at par with its global parent is fundamentally unsustainable.
Headline valuations of 20-23 times earnings do not look extreme, but pockets of excess remain. Going forward, returns will depend much more on business fundamentals than on the jurisdiction of listing. For example, in technology, unless earnings revive and valuations normalise, it will be hard to see sharp upside.
Over the medium term, equities should continue to outperform fixed income. But investors must maintain balanced asset allocation and set moderate expectations. Hyper-normal returns are unlikely.
Amid equity volatility, how has debt performed? Have returns been stronger than usual?
Radhakrishnan: Unlike equities, where valuation debates are constant, fixed income currently looks attractive. For the first time in years, inflation is not a major concern — this is a significant shift. The RBI has been accommodative not just through rate cuts but also through sustained liquidity infusion.
Inflation for this year is projected around 2.6 per cent and expected to hover around the 4 per cent target thereafter. This forms a very supportive backdrop for debt. While there may be limited room for additional rate cuts, the broader easing cycle is unlikely to reverse quickly. A combination of one more cut and supportive liquidity should aid both economic growth and debt-market performance.
Where do you see opportunities within fixed income?
Radhakrishnan: Short-duration funds have delivered strong returns over the past year. But flows into them have been subdued. The biggest bottleneck continues to be taxation, which discourages investors from allocating to pure debt products — a concern widely shared across the industry.
On the other hand, hybrid and asset-allocation products that include debt have seen robust inflows. These categories may continue to be the main channel through which fixed-income exposure gets built. Under the current tax regime, significant flows into pure debt funds will remain difficult despite favourable fundamentals.
Turning to equities again, initial public offerings (IPOs) have hit record levels. This year is likely to surpass even that. Domestic MF participation has risen sharply. Is this supply essential to prevent overheating in secondary markets? How do you evaluate IPOs or block deals?
Raj Bhan: Our primary responsibility is to deploy capital judiciously. In every bull phase, supply naturally rises because promoters and private equity investors use elevated valuations to monetise holdings. This is normal market behaviour. For us, the questions are always: Are we backing the right business? Are we paying the right price? If either answer is uncertain, we step aside. Many IPOs today come from new-age or emerging categories. These businesses may offer substantial long-term potential, and we welcome them if they meet our investment filters.
Is your approach to IPOs also similar?
Naren: There is a lot of liquidity in the system today, and it must be deployed. Without IPOs, block deals and qualified institutional placements (QIPs), it would be far harder to deploy inflows. Markets might have rallied sharply and unevenly.
But unlike the 2005-07 cycle, where banks funded capital expenditure (capex) and bore the credit risk, today the entire burden of capital allocation rests on investors — mutual funds, PMS, and AIFs. Investors must recognise this shift. Many assume equities are riskless because we are deep into a long equity cycle, but this is incorrect.
A number of companies tapping the IPO market may not be fundamentally strong. When smallcap funds receive inflows, they must deploy into smallcap stocks. If those companies raise capital at inflated valuations, it is ultimately the investor who bears the loss. Understanding this risk transfer is critical.
Despite volatility, flows into mutual funds remain strong. Does this make your task harder, particularly at stretched valuations?
Patil: In certain categories, absolutely. Large inflows into smallcaps — where free float is limited — make deployment extremely challenging. Earlier, we could allocate some portion overseas, which eased pressure; that option is no longer available. As a result, some segments become frothy.
We saw this clearly one to two years ago when mid and smallcaps experienced a bubble driven purely by flows. To manage liquidity and concentration risks, many funds broadened portfolios by adding more stocks.
Fortunately, flows have moderated and supply has increased — IPOs, QIPs, promoter sales, and activity from multinational companies (MNCs). The pipeline for the next few quarters is also strong. This additional supply will likely keep market returns more muted.
Is domestic liquidity preventing markets from correcting?
Bhan: If domestic flows alone were preventing a correction, the market would have fallen in January-March. The idea that “markets won’t come down because SIP money keeps coming in” is largely a narrative. Many investors track monthly SIP inflows to guide their decisions, but this is misleading. Ultimately, if earnings disappoint, sellers will emerge regardless of domestic inflows.
We have already seen this — foreign investors, despite earlier assumptions that India was their only meaningful destination, have sold heavily. Promoters, too, have been offloading shares. Markets naturally find their own balance. Flows can influence markets for a few months, but beyond that, fundamentals take over. While domestic liquidity may keep markets slightly elevated, it cannot determine long-term returns.
How do you deal with excess liquidity when valuations are not compelling?
Thakkar: We run only diversified strategies — not too many thematic or market cap-specific funds. This gives us flexibility to move where valuations are reasonable. Every cycle has overheated pockets and neglected pockets.
In the late 1990s, the bubble was in telecom stocks; old-economy sectors were ignored. In 2007, infrastructure and real estate were frothy, but information technology (IT) and fast-moving consumer goods (FMCG) were reasonably priced. Our philosophy is to seek areas where past returns have been modest, valuations reasonable and optimism subdued.
If we do not find opportunities, we simply do not deploy capital. We do not believe in staying fully invested for the sake of it.
How do you tackle money deployment when flows are strong but opportunities are limited?
Naren: For two years, we have consistently advised investors to prefer asset-allocation and hybrid strategies. These products are not fully invested and give us greater flexibility. Investors have responded positively. We shut our smallcap and midcap funds to subscriptions because flows and valuations made prudent risk management difficult.
Systematic investment plans (SIPs) are our preferred mechanism in most other categories. We also manage thematic funds defensively, within regulatory limits.
But markets are inherently unpredictable. Last year, we believed the US was overvalued, yet it rallied while India corrected. So, rather than rely on precise forecasts, it is far safer to focus on hybrid and multi-asset products that deliver smoother outcomes across cycles.
Raj Bhan: We rely heavily on asset allocation. Fund managers must choose which risks to take. Last year, it made more sense to favour high-quality businesses — even at expensive valuations — rather than fragile smallcaps or microcaps.
We control lump-sum inflows and emphasise SIPs. We have frozen lump-sum investments in smallcap funds for two years. Communication is equally important: Investors must understand that smallcap investing requires a five- to seven-year horizon and that SIPs are the right approach. Sensible risk management requires a combination of asset allocation, disciplined inflows and clear communication.
Which sectors look attractive currently?
Patil: Compared to two or three years ago, when sectors like real estate and capital investment enjoyed strong tailwinds, we are not seeing similar broad-based momentum at present. In such an environment, one useful framework is to look at sectors that have underperformed over the past few years and assess whether conditions are turning in their favour.
Within that lens, several consumption-oriented sectors stand out. Autos, for instance, received some support last year, though overall consumer discretionary categories — including durables — had a difficult year as urban consumption remained weak.
With rate cuts, fiscal stimulus and the 8th Pay Commission likely to boost disposable incomes next year, these segments could see a more sustained recovery. Structurally too, rising per capita incomes support the long-term outlook for discretionary consumption.
Another area worth considering from a contrarian standpoint is IT. The sector appears to have bottomed out after last year’s slowdown. The adoption of AI is likely to drive incremental demand for services, and US rate cuts could revive discretionary spending by global clients. Valuations are reasonable, dividend yields are attractive, and expectations are modest, with no one forecasting a return to the high-teens growth of past cycles.
On a relative basis as well, IT has underperformed meaningfully versus the broader market and seems to be at levels that suggest a potential bottom. This makes it an appealing contrarian and defensive opportunity.
If overseas investment via mutual funds is limited, should investors consider gold, silver or overseas assets via Liberalised Remittance Scheme (LRS)?
Thakkar: The overseas investment route is very much available — it’s just that mutual funds currently lack the leeway to deploy significant amounts abroad. Individually, however, investors can remit up to $250,000 each financial year under LRS. Several asset management companies have already set up GIFT City entities to facilitate offshore investing, and several others are in the process of doing so. Investors should actively explore this channel.
As for gold and silver, their recent rally has been driven largely by central bank buying. After such a sharp run-up, one should be cautious. These assets do not generate cash flows, making long-term valuation inherently difficult — they are essentially worth whatever two parties are willing to trade them for at a future date.
