‘India to benefit from foreign inflows, stock-specific approach better’

A sustained low inflation and supply of domestic risk capital are likely to serve as tailwinds for India’s equity markets even as earnings growth is expected to get a boost from a favourable base effect in the latter part of the fiscal, said Patil. Investors are better off following a stock-specific approach, he said. Edited excerpts:

The abatement of Indo-Pak tensions, trade deals between the US and its trading partners and rate cuts here have led to some recovery from the low of 7 April. Is the worst behind the markets? How are our markets looking from here, and your take on returns compared with the past five years? 

Most of these known factors are already discounted in the market prices. While investing in equities, investors are always exposed to a few unknown risks. Hence, investors should ideally be focused on the macro fundamentals and expected earnings growth. 

Also read: Boom in unlisted NSE shares strains grey market trades

It is amply clear that the US is open to negotiating the trade deals. At home, we have a growing economy, stable macros, improving terms of trade, improving primary deficit, relatively stable currency and low inflation.. A structural rise in discretionary consumption may further aid economic growth. A sustained low inflation and supply of domestic risk capital are likely to serve as tailwinds for the equity markets. Earnings growth may drive the stock prices. Investors should expect a stock-specific market, going forward. 

Investments in diversified equity mutual funds with a five-year timeframe may generate healthy risk-adjusted returns. 

FPIs appear to have returned to the market in the past month and a half. Will their inflows sustain, given the narrowing yield gap–earnings yield on equity narrowing with respect to the US bond yield? 

Earlier, we have seen money flow from emerging markets to the US, and foreign portfolio investors (FPIs) were underweight on Indian equities. However, as the US is expected to slow down amidst trade wars, the money is expected to move out of the US. As the dollar index trends downwards, investors are moving away from the US dollar and getting into gold and emerging market equities. India can be one of the key beneficiaries of flows. The yield gap has limited relevance. 

Is SIP the best mode for the small retail investor?

As mentioned earlier, Indian equities are expected to do well over the medium term, as both domestic and foreign investors would like to participate in the India growth story. The SIP is a disciplined method of investing in equities. Investors choosing SIPs over trying to time their equity investments is structurally positive for wealth-creation at the investor level. The SIP book has been supportive for our equity markets as well.

Also read: Why the bond market is unfazed by a 22-year-low yield gap

There is an argument that earnings have been better than estimated in Q4FY25. But if earnings growth is in a single digit, how do you justify Nifty/Nifty 500 valuations?

The earnings growth in Q4 FY25 was better than estimates. Analyst estimates were also somewhat muted due to an expectation of a slowdown after Q3 numbers. Stock valuations are also guided by the prevailing interest rates in the economy. Low interest rates encourage investors to ascribe higher multiples to stocks in a growth market such as India. Analyst estimates of earnings will also factor in the lower financing costs. Also, the base effect will play favourably for earnings growth in the later part of FY26. 

 Are you fully invested or keeping some powder dry? Why? 

We do not hold high cash levels in our equity portfolios. Our investment process expects us to make investment decisions after considering business fundamentals, and not go in cash anticipating market movements. In most cases, it is futile to predict corrections. Also, we presume that our investors have done their asset allocation, and when they invest in equity schemes, they have handed over money to us to buy stocks. Hence, it makes little sense to hold high cash levels in equity schemes.

In the current market, which sectors will you buy and which ones will you avoid? 

At core, we are growth investors. We look for companies in a favourable business cycle, with a promoter track record of efficient capital allocation, strong balance sheet, scalable business, reasonable return on capital and higher growth rates compared to peers.

As a fund house, we look at emerging and growth sectors. The capital goods, engineering and discretionary consumption basket seems positive. 

Also read: FPI assets regain $800 bn level after four months as markets rebound

Considering the current scenario, we are avoiding low-growth and high-valuation companies. We tend to avoid new-age, loss-making companies at higher multiples. We are avoiding shipping, hard commodity and commodity chemicals companies.

How is the churn at the portfolio level?

We invest for the long term. Investing in high-quality companies with a long growth pathway and holding on to the stocks for long helps us benefit from compounding. We avoid excessive churning in our equity portfolios. But we may book out if the underlying investment thesis changes. We tend to act swiftly whenever there is a stock-specific development or an event impacting the broad market.

On the regulatory front, Sebi allowed a new asset class, Specialized Investment Fund (SIF), with a minimum ticket size of ₹10 lakh. How is it shaping up?

Our financial markets are evolving, and growing investor interest is evident in portfolio management services and alternate investment funds. The SIF, at the ticket size of ₹10 lakh, can be the perfect product with the right positioning. Investors in SIFs are expected to benefit from evolved investment strategies and transparent working of mutual funds.