'We are seeing strong traction in our passive business'

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

We believe the large-cap index is valued in line with the last 10-year average. This implies that the returns from the index should track earnings growth seen in the space. The mid-cap index is trading higher than large-cap valuations by 50 per cent, and the small-cap index is trading higher than the large-cap index by 15 per cent.

At Motilal Oswal AMC, we believe this period is unlike what we have seen earlier. Many new businesses with a long growth trajectory and a good quantum of growth have emerged over the past few years. For example, EVs (electric vehicles), EMS (electronics manufacturing services), new tech, renewable, etc, are all new and delivering strong growth.

Besides these, businesses like hospitals, defence, Make in India manufacturing, etc., also offer a strong growth trajectory. Being young, most of them are still in the mid- and small-cap spaces. Given their higher growth trajectory, we believe valuations should also sustain. The faltering of the growth quotient is the key risk factor.

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

The Indian market has participants like family offices, retail investors, HNIs and institutions like banks. Passive products are a great way to enter the market.

Knowledgeable investors can build or are building their portfolios using passive funds. We're seeing strong traction in our passive business. However, for retail investors who are less informed, it's better to entrust monies to an active fund manager who can take sectoral and (maybe) style calls, or else they may end up holding an investment past its prime.

Will AI impact your business? How and why?

AI is a major business enabler. We are looking to deploy it in areas like client servicing, to start with. In investing, we have capabilities in quant funds. Over time, we expect it to be AI-aided. Similarly, in research, AI could help crunch data in a shorter period.

Rapid-fire questions

• If your fund house had a superpower for investors, what would it be?
  The reason why an active fund house exists is that it consistently generates alpha for investors. Hence, it is keenly sought. That said, I am not a believer in superpowers. It is best to have a level playing field where each participant creates their own strategy to win for clients and lets time decide the outcomes. This gives me joy. Having a superpower would kill that joy.
• The biggest mutual fund myth you'd debunk.
  I think equity mutual funds are the best investment vehicle for investors. It has the edge of tax efficiency. Equity funds are managed differently. For example, in the mid-cap fund universe, not all the funds are alike. Some funds may be closer to the index while some may not be. At our house, we aim for high growth in EPS, and our constructs reflect this.

This article was originally published on October 30, 2024.