'Valuations not attractive, but comfortably reasonable'

Summary: Despite the ongoing correction, HSBC Mutual Fund’s Cheenu Gupta believes that valuations across the Indian equity market have become largely favourable. She discusses the reasons behind the same, and much more, in this exclusive interview.

The Indian equity market has had a turbulent time of late, with uncertainty around tariffs, AI, crude oil price fluctuations and the US-Iran war keeping investors on edge. Subsequently, a few of HSBC Mutual Fund’s equity schemes, such as the HSBC Midcap Fund and the HSBC Large & Mid Cap Fund, have experienced higher-than-usual portfolio churn. As per Cheenu Gupta, Fund Manager – Equities at HSBC Mutual Fund, this is attributed to the large shifts in market volatility and stance, making it challenging to maintain similar portfolios across changing market environments. That said, she remains unfazed by the ongoing correction, noting that valuations look quite reasonable at current levels.

Gupta currently manages five funds at the AMC with a collective AUM of Rs 19,100 crore, of which the HSBC Equity Savings Fund and the HSBC Midcap Fund are rated four stars by Value Research. Prior to joining HSBC Mutual Fund, Gupta had stints at Canara Robeco Mutual Fund, TATA AIA Life Insurance Company and UTI Mutual Fund.

In this interview, Gupta also sheds light on her stockpicking approach, the performance of her equity savings and conservative hybrid funds and where she sees attractive investment opportunities for lumpsum investors.

You mentioned earlier that valuations had looked somewhat stretched, but now they appear much more comfortable. Has the correction led to a broader normalisation in valuations across the market, or do you still see certain pockets offering more attractive opportunities than others? Also, how are you approaching the market at this stage? Are you selectively identifying specific sectors or themes, or do you believe the broader market is once again opening up for fresh buying opportunities?

Let me start by saying how we view overall valuations. If you look at large-cap valuations, they are trading at around 20 times. I think that is reasonably decent, considering the historical perspective we have on large caps. Even when you look at mid-cap valuations, they are lower than where they have been over the last three to four years. And when it comes to small caps, I think this space has really seen a healthy correction. A large basket of small-cap stocks is, in fact, down almost 30-35 per cent from their highs.

So, relative to one another, valuations across all three categories are somewhat reasonable. Again, I will reiterate that they are not, as one would say, attractive, but they are comfortably reasonable. When it comes to sectors, there is clearly some diversification. We are seeing that sectors with good earnings visibility are the ones where valuations have moved higher or continue to remain elevated. Whereas in sectors with low earnings visibility, I think we have seen sharper corrections.

At the same time, there are some pockets, such as financials, especially the lending space. You will see that asset quality there is reasonably healthy, loan growth continues to be healthy, and, despite that, there has been some valuation correction due to macro concerns across the country. So, pockets like these have become really attractive.

Hence, I think the market right now is a mix of categories: some pockets have become very attractive from a valuation standpoint; some areas continue to command higher valuations because visibility remains strong; and there is a third bucket where we say pricing power may or may not sustain. That is the area where valuations look comfortable, but you have to take prudent calls on when to enter those pockets.

How would you describe your stockpicking style? Does it lean more towards growth, value or a blend of both, and how has it evolved over time?

I think that over time, style matures and settles, and the same has happened to me. The way I now look at portfolio construction and stock picking within those portfolios is through three buckets.

The first bucket in the portfolio is dedicated to stability. About 20 per cent of the portfolio allocation is primarily determined by which stocks can potentially provide stability to the portfolio.

The next 50 per cent, which is a sizable proportion of the portfolio, is oriented towards growth. These are companies that are growing faster than their peers or the industry as a whole. Here, I think these companies enjoy a moat. And if you understand moats, by definition, they are not permanent in nature. There is a certain period during which these moats come into being, for whatever reason. It could be because the company has undergone a change in its business model, experienced regulatory changes or made product-related changes that have strengthened these moats.

During this period, I think these companies enjoy relatively faster growth. The idea is to identify companies with higher earnings visibility, greater earnings durability and the potential to scale during this phase. So around 50 per cent of the portfolio is dedicated to companies selected through this lens.

Now comes the last 30 per cent. This part of the portfolio is primarily for companies in a turnaround phase. And turnarounds can happen for various reasons. Let me cite a few examples. It could be due to the cyclical nature of an industry. Many industries we see, from hospitality and travel to hospital segments, exhibit a degree of seasonality or cyclicality. Companies in the commercial vehicle space are another example. Often, as the cycle turns, valuations in these categories can become attractive. This is the stage where we would want to allocate capital to them.

Sometimes, regulatory changes in an industry can suddenly put sectors into a turnaround phase. We have seen examples such as safeguard duties imposed on the steel sector. These are situations in which industries that earlier did not enjoy much appeal suddenly become more compelling. This is also the phase where they often move into the value zone.

Thus, around 30 per cent of the allocation goes to ideas undergoing a turnaround. Overall, if I look at the portfolio construct, around two-thirds of the allocation is towards growth, while one-third is towards ideas where we see opportunities for potential long-term alpha generation.

Your portfolio positioning appears to be tilted more towards the growth side, and that may also be reflected in the relatively high portfolio turnover across some of your equity funds. For instance, funds like the HSBC Midcap Fund and the HSBC Large & Mid Cap Fund have turnover ratios exceeding 100 per cent. Investors are often advised that long-term wealth creation comes from a buy-and-hold approach. How should they interpret such high portfolio churn? What is driving this turnover, and how do you reconcile it with the broader philosophy of long-term investing?

This is a very good point, and it’s good that you brought it up.

I think a big factor this year has been the way markets have behaved. Generally, the portfolios have had relatively high churn, historically in the range of 70-80 per cent. The reason you are seeing relatively higher churn now is largely due to market behaviour. Look at the way markets have changed this year. There was a period when uncertainty about exports was high. You did not know how tariffs would pan out or whether trade deals would come through. As soon as that phase ended, uncertainty about AI emerged. We did not know how it would impact certain sectors and jobs. And last, but not least, came the war, where you saw not just crude but other commodity prices also move higher.

I think the volatility and shifts in market stance we have seen this year have been particularly large. Having the same portfolio suited for all environments would have been a little tricky. Let me give you an example. We would want our portfolios to reflect the current environment. One call we took in the last 3-4 months was around higher commodity prices. We believed that if commodity prices were rising, the portfolio should have an allocation to commodities to benefit from stronger earnings in these sectors.

At the same time, industries use these commodities as raw materials. Some of them would have pricing power and be able to pass the pressure on, but others would not. So we reduced our allocation in companies where we believed pricing power was limited and reallocated that space to commodities. Historically, these portfolios did not have allocations to metals or upstream oil and gas companies. But in the last three to four months, we have increased allocations to these spaces. And this is not just tactical. We believe that the way the geopolitical environment is evolving is structural.

Governments across the world are moving to protect their metal industries, which was not the case earlier. The US started it, India followed in November-December last year and now Europe has introduced CBAM (Carbon Border Adjustment Mechanism). Across the globe, countries are protecting their metal industries, which puts them in a better position. Similarly, crude prices seem to have moved higher structurally. We are not saying prices will remain above $100 per barrel, but even if they come down, they may not return to the $60-70 range we were used to earlier. In that environment, we would want to own upstream oil and gas companies. Hence, making these decisions in the portfolio is more about responding to market demands and doing what benefits the portfolio. That is one reason I would attribute specifically to this year.

Apart from that, there is another reason. Fund managers often make calls based on a set of assumptions, such as competition intensity, industry dynamics, raw material scenarios or regulatory conditions. But during the period you remain invested, these things can change. At that point, it makes sense to revisit the original thesis and reassess it. I'll give you an example: quick commerce is one space that we picked very early, and the portfolio benefited significantly from it. In fact, one of our top holdings was among the country's leading quick-commerce companies. Throughout last year, it remained a top holding.

However, at the beginning of this year, we realised there had been a massive shift in competitive dynamics. Till last year, there were three active players. This year, five players became very active and a sixth was waiting on the horizon. That naturally calls for a re-evaluation of the competitive landscape. Hence, we reduced our allocation to the quick-commerce space at the beginning of the year because we felt the competitive dynamics had materially changed and required fresh evaluation.

I will also tell you where churn may not happen. If you are invested in traditional sectors like Banks, particularly large private-sector banks, you can expect very little structural change. You may remain invested because the scenarios there do not shift dramatically. But when you invest in new-age companies, things can change materially and quickly. A reasonable proportion of our portfolio is also allocated to such businesses. While traditional sectors like Banking continue to be a sizable part of the portfolio, scenarios in new-age businesses evolve rapidly, requiring more active decision-making. That is one of the key reasons you see higher churn in the portfolio.

Your Equity Savings Fund has stood out in its category, delivering a CAGR of around 12.45 per cent over the past five years as of April and maintaining a 12 per cent-plus return profile since June 2024. In a category typically seen as conservative, what have been the key drivers of this performance? For our viewers, could you also briefly explain how this category works and what you have done differently compared to peers?

I think the first aspect is the kind of equity allocation we maintain. Our equity allocation in the Equity Savings Fund (as of April 30, 2026) is generally somewhere between 30 and 40 per cent. There are instances where some funds keep it much lower, around 15-20 per cent. Historically, SEBI had allowed equity allocation of up to 45 per cent, and we have largely operated within the 30-40 per cent range. Going forward, SEBI itself is reducing this limit to 40 per cent, so we would continue to operate closer to the 35-38 per cent range. That is broadly how we would approach this allocation window.

Apart from that, the way we pick stocks within the Equity Savings Fund is slightly different. We do not structure the equity portion the same way we would for a typical diversified equity fund, where every sector must be represented. The idea here is that, because equity itself has a limited allocation, only high-conviction bets should be included in the portfolio. There is no pressure on this scheme to stay invested across every sector or across too many ideas.

So, the approach is simple: if there is high conviction, we allocate weight to it. If there are no strong conviction ideas available, we allow that allocation to move towards arbitrage, effectively reducing equity exposure. I think this approach has worked very well for the fund, being extremely selective about which stocks to own and limiting allocation to companies with strong earnings visibility and very high conviction. Those are the names that find space within that limited equity allocation.

Thus, I think that has been one of the key reasons the strategy has worked. And yes, historically, the fund has delivered a CAGR of around 12 per cent.

On the other hand, the HSBC Conservative Hybrid Fund has delivered relatively modest performance, with returns that have barely beaten the category average over the longer term. Where do you think the drag has come from? Has it been more due to equity allocation and valuations, debt positioning or overall asset allocation decisions?

Now, the performance may not be as high as the Equity Savings Fund's, but that is also because of how we run the portfolio. We manage it as a genuinely conservative portfolio.

The equity allocation allowed in this category is up to 25 per cent, but intentionally we have chosen to operate at around 17-18 per cent. We have deliberately kept this allocation conservative for investors looking for a more savings-oriented product.

For us, the Conservative Hybrid Fund is meant to be a traditional conservative offering, with an equity allocation of around 17-18 per cent and the remainder largely driven by what debt can deliver. Hence, the portfolio's return profile aligns with that philosophy.

Unlike the Equity Savings Fund, which has followed a more differentiated stock-investing approach that has stood out for us, this portfolio follows a different framework. Hence, I think these are two distinct approaches we have maintained across the portfolios: one is intentionally more conservative, while the other aims to differentiate ourselves more through our investment style.

You’ve mentioned that you have consciously kept the Conservative Hybrid Fund quite conservative by maintaining relatively low overall equity exposure. However, within the equity portion, a significant allocation appears to be toward mid-cap stocks, which are generally considered more volatile. What has been the rationale behind introducing relatively higher-risk equity exposure within a conservative product? How do you think about balancing return potential and risk in this context?

I think mid caps and volatility should not necessarily go together. The perception that mid caps are inherently volatile needs clarification. Yes, small caps can be considered volatile, but mid caps can deliver healthy earnings growth if they offer good earnings visibility. 

After maintaining a relatively low equity allocation of around 17-18 per cent (as per March disclosures), we wanted to pick stocks with strong earnings visibility. So naturally, the focus has been on companies where we have higher confidence in growth and earnings sustainability. If certain mid-cap companies meet those parameters, they are added to the portfolio. Thus, that has been the rationale behind the allocation. I do not consider these stocks inherently volatile. Rather, the allocation has been determined by business quality and earnings visibility, not solely by market-cap classification.

For investors looking to deploy lumpsum money today, where do you see the strongest opportunity across equities, fixed income and commodities like gold and silver? Which asset class gives you the highest conviction right now, and why?

Let’s start with fixed income. What we are saying there is that the rate cycle itself is turning. We are coming out of a phase where rate cuts were happening, a period during which fixed income looked relatively more attractive because you also had the benefit of capital gains. Soon, we could be entering a phase where rates start moving higher; not immediately, but sometime later. This is typically not a very favourable environment for fixed income. Yes, accrual returns can still occur in that category, but the scope for capital gains may not be there.

The next bucket is gold and silver, the commodity segment that you spoke about. I believe these have become a very important part of an investor’s portfolio today. Some degree of diversification into these assets is required, especially given the geopolitical environment, and there is also structural support for these commodities, driven by factors such as central bank buying. However, these asset classes have already delivered very strong returns over the last one to one-and-a-half years. Typically, whenever an asset class delivers such outsized returns, it goes through a phase of consolidation. I think we may be entering such a period now.

The idea here is to stay invested or gradually accumulate in this category if you do not already have the desired allocation. But I do not see these categories running away sharply in the near term.

The third bucket is equities. We believe equities are coming out of a very troubled period, and by that very definition, the upside potential here can be meaningful because you are starting from a relatively low base.

I would still maintain that near-term visibility for equities is not particularly strong, especially given that crude remains at current levels. As we speak, crude is above $120 per barrel, and these conditions are tricky. If prices remain elevated for a prolonged period, you could see earnings downgrades across several sectors, though there will also be some sectors where earnings improve. From a fund manager’s perspective, taking those calls and reflecting them appropriately in the portfolio becomes important to safeguard earnings. So, if you look beyond near-term volatility driven by higher commodity and crude prices, I think medium- to long-term starting points for equities appear quite interesting. That is how I would look at it.

Also read: We don't throw good money after bad valuations: Nippon India Mutual Fund's Sailesh Raj Bhan