Talking value, buying froth?

Summary: Fund flows often reveal more than headlines, especially when they appear to contradict earlier warnings. What looks like froth on the surface may actually reflect a deeper rethink of what safety means in investing. The real story lies in how definitions are shifting and where the smart money is quietly moving. Every month, I track where active mutual funds are putting their fresh inflows. It’s a fascinating exercise, a glimpse into the collective wisdom, or folly, of India’s smart money. Since April 2025, one trend has stood out like a neon sign: almost 60 per cent of equity fund flows have landed in mid-cap and small-cap stocks. That’s double the expected share based on funds’ allocation limits. Now pause for a moment. Barely six months ago, every fund manager was warning us about stretched valuations in the broader market. And yet, they are doubling down in the very same space. So, what happened to the old gospel of “margin of safety”? Why are managers parking money in richly valued companies after years of swearing by cheap valuations? The answer lies in how their investing framework itself is getting redefined. The shift from cheap stocks to growth stocks For most of the last decade, markets favoured margin of safety, i.e., lower valuations over growth potential. This meant companies with higher multiples, say P/E of 70 or 80 times, were never attractive propositions. But in today’s market, especially given the bull run of the last five years, finding a healthy margin of safety is practically impossible. Valuations now rarely collapse to levels that make stocks dirt cheap. And waiting for that moment means sitting out entire cycles. So, fund managers are having to reframe what margin of safety means. It is no longer about simply buying cheap. It’s about buying at a price that strong earnings visibility can justify, even if that means g

This article was originally published on October 01, 2025.