A lot of money shifted to the US last year on tariff worries, with emerging markets, including India, losing flows; and slower earnings and GDP growth exaggerated the move, said Nimesh Chandan, chief investment officer at Bajaj Finserv AMC, which manages equity assets worth ₹27,700 crore as of July.
Chandan said that as uncertainties ease, India isn’t much hit by tariffs, and domestic demand measures are kicking in. “That sets the stage for money to return.”
Edited excerpts:
Could you walk us through your investment thesis, explain the INQUBE framework, and how you apply it to stock-picking?
When we framed our investment philosophy, we asked: what really generates alpha?
Our philosophy, INQUBE—information, quantitative, behavioural—works like a factory. Whether equities or fixed income, everything goes through these tools to improve outcomes. In equities, we use checklists, journals, and pre-mortems; in fixed income, tools to gauge rates and spreads.
The information edge comes from knowing something earlier or better than others, though today, it’s harder and costlier to sustain. The quantitative edge is about processing the same information more effectively through models and tools, though these, too, can eventually be copied. The most enduring is the behavioural edge: understanding biases, avoiding emotional decisions, and taking advantage of crowd sentiment.
How do you look at large, mid and small caps from the perspective of valuation and stock picking?
Market capitalization alone doesn’t reveal a company’s wealth creation potential. Whether a firm has a market cap of ₹2,000 crore, ₹20,000 crore, or ₹2 lakh crore, you can’t predict which will deliver the best returns in five years without looking at the business, management quality, and valuation. A small-cap may look attractive, but if the business isn’t strong, size alone won’t drive returns.
Opportunities arise because the crowd often generalizes. When small caps are overhyped, even weak businesses get high valuations–those are times to sell. When the crowd turns fearful, as seen during the January–March correction, even strong small caps are sold off, creating buying opportunities. The same applies to themes like defence, where companies get re-rated just for having “defence” in their name.
So rather than buying or selling based only on market-cap categories, we focus on business prospects and use screeners to spot where stocks are overbought or oversold. That’s how we adjust allocations, like increasing exposure to small caps across our funds when sentiment turned too negative in March.
Today, the investible universe feels more defined. In large-caps, you have around 100 companies; in mid-caps, roughly 150; and in small-caps, close to 900. This naturally raises a question: should funds be designed to move flexibly across categories to access a wider universe, or should they stick to a single category and run with a more concentrated portfolio?
In large-cap funds, regulations mandate 80% allocation to the top 100 companies. Holding 50–60 stocks makes the fund resemble the index, so we cap it at 25–30 to maintain concentration, stand apart, and build higher active share.
Active share is essential for outperformance. It creates distance from the benchmark, but it must be backed by strong research and stock selection.
The same applies to mid-caps, where we’d prefer a focused approach. In small-caps, diversification works better; even 90 picks out of 900 provide enough differentiation while keeping active share intact.
In the past quarter, if we look at small-cap schemes, the share of high net-worth individuals (HNIs) has declined while retail participation has risen. HNIs are generally considered to be more risk-averse, but retail investors are putting more into riskier mid- and small-cap schemes compared to large-caps. What’s causing this?
While I haven’t looked at it closely; it’s hard to generalize how people allocate across categories. What I have noticed in recent years is that both HNIs and retail investors are behaving more maturely. Corrections are no longer met with panic redemptions; instead, dips are being bought, supported by SIPs (systematic investment plans) and systematic allocation. Investors now seem emotionally better prepared for volatility and are using corrections to top up rather than exit.
That said, the surge in F&O volumes is worrying, with Sebi (Securities and Exchange Board of India) data showing that 90% of traders lose money. The risk lies in people chasing quick gains with leverage. But these are largely traders. Investors, on the other hand, are showing greater maturity and understanding of the markets.
What is your reading of the latest earnings season? How were upgrades in comparison to downgrades? And how much time would it take for earnings to recover?
Internally, we see about 70% of companies meeting or beating expectations and 30% missing, a ratio that’s held steady for 2–3 quarters, even improving slightly. So, nothing extraordinary this quarter, and forward Nifty earnings estimates for FY26–27 have barely changed—only about 1%.
What’s different is the set of triggers: tax cuts, lower interest rates, liquidity support, GST reforms, and the upcoming pay commission. These make the outlook for the next 2–3 years very strong. Consumer companies are expecting a solid festive season, with rural steady and urban showing recovery. Overall demand is healty, with corporate capex likely to pick up alongside government spending, setting the stage for a virtuous growth cycle.
Households, too, have strengthened balance sheets over the last two years, gaining in equities, debt, gold, and property. With these tailwinds, private capex should return, supporting earnings. Nifty earnings growth is expected to rise from 6.5% last year to about 12% this year and around 15% next year, reflecting stronger demand.
In the short term, quarterly beats and misses drive stock prices, but over time the index tracks earnings growth. Over the past 21 years, Sensex earnings and the index both grew 13x, showing that long-term cycles are driven by earnings momentum, not quarterly swings.
Foreign portfolio investor (FPI) ownership in Indian equities is at a multi-year low right now. Does that change anything for the markets, given the uncertainty?
People usually wait for clarity before estimating the full impact. In uncertainty, investors cut valuations, not earnings. That’s what happened in the first half with war-like tensions and tariffs. EPS (earnings per share) estimates didn’t change, but P/Es (price-to-equity multiples) were reduced as a safety measure. Once uncertainty clears, markets re-rate upward.
A lot of money shifted to the US last year on tariff worries, with emerging markets, including India, losing flows. Slower earnings and GDP growth exaggerated the move. But now uncertainties are easing, India isn’t much hit by tariffs, and domestic demand measures are kicking in. That sets the stage for money to return.
Whenever FPIs are underweight India and shorts are high, it often fuels the next rally. We already see foreign participation in IPOs (initial public offerings) and QIPs (qualified institutional placements). So, they aren’t out of India; just investing differently.
No serious global investor can ignore India—we’re on track to be the third-largest economy, with stronger macros and demographics than most peers. It’s only a matter of time before liquidity returns, even if the exact month is hard to pin down.
You mentioned the triggers driving growth, but what factors do you see that could hold back the markets?
We mainly track two areas—employment and inflation. Any red flags there could hurt the economy. Right now, both look healthy. Job indices and PMIs (purchasing managers indices) are strong, inflation is below estimates, giving the government and RBI (Reserve Bank of India) room to focus on growth. Yes, there are job cuts in IT and low household savings, which may strain some segments. But GCCs (global capability centres) are expanding, and IT hiring continues there. And overall, these look more short-term. As the economy takes off, we expect sequential improvements. So, am I worried? No.
Do you have any contrarian views?
Metals remain a contrarian bet for us—strong cash flows, solid balance sheets, attractive dividends, and trading at or below replacement cost. Healthcare, despite negative sentiment over US tariffs, looks appealing. Domestic pharma and hospitals are doing well, and Indian generics continue to deliver huge value in the US. Valuations are attractive because fear has dragged them down, even though quarterly results are strong. Once there’s clarity on tariffs, we expect a recovery. Even in BFSI (banking, financial services and insurance), valuations look attractive, and we expect better times in the second half of the year.
To sum up, Indian markets today are like a coiled spring—once uncertainties like tariffs clear, we could see a sharp rally.
With the ongoing tariff negotiations, trade deal with the UK and the country looking at signing more free-trade agreements, how is India placed among peers in drawing foreign money?
Because of the tariff situation, many countries in Europe and Asia may want to diversify their exports and reduce dependence on the US. India, being both a large market and a reliable value supplier, naturally becomes an attractive alternative.
The ‘China-plus-one’ strategy has also gained traction, with companies looking to avoid over-reliance on China for sourcing. India fits perfectly in this sweet spot—as both a dependable supplier and a lucrative market.
In fact, India has already signed trade agreements since 2022 with the UAE, Australia, Norway, Switzerland, Iceland and most recently the UK. A deal with the EU also seems close. All this makes India a very attractive destination for foreign investors to look at.
Since you admire Charlie Munger, which of his principles do you apply most often, both in investing and day-to-day life?
I’ll say three principles from Charlie Munger that I follow. First, temperament—he said even people with high IQ make investment blunders if they lack the right temperament. How you behave determines how your investments behave. Second, as he often said, Warren (Buffett) and I created wealth by avoiding stupidity, not by trying to be overly intelligent. Chasing big gains with high risk creates problems. Third, his idea of inversion—always invert. Don’t just ask what makes a company successful, ask what can make it fail and ensure they avoid that. As Munger put it, ‘I just need to know where I’m going to die, so I never go there.’
