'Overweight on large caps would provide stability in adverse events'

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

Equity markets are a function of both earnings and multiples. On the earnings front, we have consistently seen over time that nominal GDP growth has translated into similar earnings growth for corporations. Cyclicality comes into play through profit pool participation across sectors over shorter periods, but over longer periods, almost every sector has grown in size and scale.

Multiples are currently influenced by liquidity and recency bias. Markets have their own ways of evaluating and, at times, extrapolating the current earnings trajectory to a longer timeframe. This can create higher/lower multiples for the same earnings over time. Having said that, overvaluation in a few sectors/sets of companies is usually offset by undervaluation in some other sectors/sets of companies.

Liquidity is another variable that seems to be a predominant force in markets today. At Mahindra Manulife Mutual Fund, we expect supply to catch up to provide equilibrium, which can help rationalise overvaluation as money finds newer opportunities. On our portfolios, we believe having a slightly more overweight stance on large caps as well as on companies with valuation comfort, which would help provide some stability in case of any adverse events.

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

Passives are already an integral part of the investing landscape. However, we also believe active managers will always remain a core and relevant choice for investors, given the Indian market opportunity. Both approaches will complement each other as opposed to competing for wallet share. The key aspect to consider is the role each investment product plays in the investor's overall asset allocation rather than the type of product.

Will AI impact your business? How and why?

AI and other technology tools have the potential to impact all functional aspects of the business. Within this, customer service, equity and credit research and risk management are perhaps the areas that can materially transform with the use of technology.

Rapid-fire questions

• If your fund house had a superpower for investors, what would it be?
  Patience.
• The biggest mutual fund myth you'd debunk.
  That mutual funds are all about equity.
• An unconventional asset class you'd add to your portfolio.
  Art.
• A Bollywood movie that best represents the mutual fund industry today.
  Udaan.

This article was originally published on October 30, 2024.