'Historically elevated valuations suggest returns may lag earnings'

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

From a three-year perspective, earnings are the main driver of equity returns. Indian corporates are well-positioned in the profit cycle, with a rising profit-to-GDP ratio over the past four years. Valuations, measured by the earnings yield spread over government bond yields, are higher than historical standards. This suggests index returns might lag behind earnings growth due to elevated valuations. Broader market valuations are even more expensive than large-cap indexes. In our asset allocation products, we consider these
top-down views.

However, in our equity schemes at SBI Mutual Fund, we maintain a long-term perspective and employ a bottom-up approach, concentrating on companies with strong business models, long-term earnings growth visibility and sustainable cash flows. We believe this will enable us to navigate market corrections while staying focused on long-term returns. Any market turbulence should bring back attention to fundamentals.

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

The investment landscape in India is evolving rapidly, with passive investment options like ETFs, FOFs (fund of funds) and index funds gaining significant traction. Factors like low cost, simplicity and market-aligned returns drive this growing interest. However, raising awareness about both active and passive offerings is crucial, enabling investors to assess their personal financial situations and align their portfolios with their goals.

Will AI impact your business? How and why?

Change is constant in both our personal and professional lives. In financial services, technology has significantly simplified our lives by making information readily accessible. AI is poised to enhance our processes across operations, service and investing. Today, investors and distribution partners leverage AI to receive more personalised services and streamline their operations.

Rapid-fire questions

• If your fund house had a superpower for investors, what would it be?
  Ensuring all SIP investors regularly top-up their SIPs as their incomes rise.
  
• The biggest mutual fund myth you'd debunk.
  Mutual funds are not only for equity investors. We also have fixed-income and hybrid fund offerings that diversify across multiple asset classes.
  
• An unconventional asset class you'd add to your portfolio.
  Commodities. They provide a valuable hedge against inflation and currency fluctuations, making them a crucial component of a diversified investment portfolio.
  
• A Bollywood movie that best represents the mutual fund industry today.
  Dangal. It exemplifies the power of determination, shattering investing stereotypes and adapting to changes in regulations, markets and investor needs.

This article was originally published on November 05, 2024.