'Small-cap valuations are expensive but still in the comfort zone'

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

Large-cap valuations are in the comfort zone, with Nifty50 trading at a P/E of around 19x forward earnings, at par with the 15-year average. Mid-cap valuations, however, are out of sync with historical averages and large-cap valuations. They currently trade at an 80 per cent premium to large caps, compared to the historical 20 per cent premium. This seems unjustified, given the reduced growth delta. Notably, only 30 of 150 mid-cap stocks account for most of the rally.

Small-cap valuations are expensive but still in the comfort zone. Historically, they traded at par or a slight discount to large caps, but now they trade at a 10-15 per cent premium. The small-cap universe offers more choices for selection.

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

Passive funds aren't a fad. However, at Helios Mutual Fund, we consider them the underperforming cousins, making the well-managed active funds look highly attractive. Despite lower fees, passives follow events after they happen, while actives try to preempt moves, generating positive alpha.

The only thing going for the passive funds is the low fee. It is justified as the investor essentially becomes the fund manager, deciding which stocks to buy. The passive fund is just an executor of such trades.

Will AI impact your business? How and why?

AI won't replace fund managers as human traits - the gut call - are needed for crucial investing decisions. Fortunately, AI, for now, is missing a gut. However, it will assist research, making it more efficient. We're using LLMs (large language models) to assist our research team in running through thousands of emails in fractions of minutes and throwing up stocks where the trends are changing for the good or bad.

In sales, the human touch remains crucial, but AI will likely replace some back-office operations, improving efficiency.

Rapid-fire questions

• If your fund house had a superpower for investors, what would it be?
  Make money irrespective of the moves in the market.
• The biggest mutual fund myth you'd debunk.
  That the big fund houses are safer than the new entrants. The recent entrants are more hungry for success and run the portfolios more actively.
• An unconventional asset class you'd add to your portfolio.
  Allow naked shorts for hedging a long portfolio.
• A Bollywood movie that best represents the mutual fund industry today.
  Lagaan. It represents how the domestic mutual fund industry has overcome the dominance of the FIIs (foreign institutional investors).

This article was originally published on October 28, 2024.