'We see ample opportunities for alpha generation in the country'

How is your team viewing the current market valuations and preparing for possible corrections?

Nifty delivered 15.2 per cent returns over FY04-24, driven by 11 per cent earnings growth. India's corporate profit grew at a CAGR of more than 20 per cent over FY20-24 and may grow 15 per cent over FY24-26. While corporate profits grew strongly, Nifty's ROE jumped from 12 per cent in FY20 to 16.3 per cent in FY24 (decadal high).

Expectations of superior earnings growth and higher ROE could lead to premium valuations for India. However, disappointing growth could correct valuations. At HSBC Mutual Fund, We are optimistic about Indian equities, supported by a strong medium-term growth outlook, but cautiously so, expecting reasonable growth driven by capital expenditure, positive global factors and domestic economic resilience.

Are index and factor-based passive funds a fad or a lasting investment strategy?

Structural trends and empirical evidence support index and factor-based investing will remain crucial for the investment landscape.

Taking cues from the US, the mutual fund industry there is very mature, with over $35 trillion in AUM. As US investors matured, more assets were deployed in passive than active funds over the past decade. Accordingly, total assets in US passive mutual funds and ETFs (exchange-traded funds) surpassed those in active ones for the first time in 2024. The Indian mutual fund industry is still small at $0.8 trillion mutual fund and is growing rapidly. Like the US in the 1980s and 1990s, India is on a financialisation journey.

We see ample opportunities for alpha generation in India and remain optimistic about active investing over the next decade. India started with index-based funds and is now seeing an increase in factor-based funds. Passive AUM in India is expected to grow, driven more by provident funds, pensions, etc. HNIs are increasingly lapping up passive funds, and we believe they will be more acceptable over the next five years.

Will AI impact your business? How and why?

AI will help tremendously in data analytics, helping organisations strategically target segments to enhance operations. It will also help improve fraud detection, risk management, customer service and investment analysis.

Rapid-fire questions

• If your fund house had a superpower for investors, what would it be?
  Stop tracking NAVs (net asset value) daily.
  
• The biggest mutual fund myth you'd debunk.
  That mutual funds are a good fit only as a long-term investment option.
  
• An unconventional asset class you'd add to your portfolio.
  Art.
  
• A Bollywood movie that best represents the mutual fund industry today.
  Srikanth.

This article was originally published on October 28, 2024.