Improving domestic growth, rising liquidity, and potential rate cuts are expected to aid recovery, but the “real concern is on the external front” from growing global protectionism to US-China tensions, said Mantri, chief investment officer (CIO) at the company.
Mantri isn’t worried about domestic markets. Even though small-cap valuations are a concern, he expects stable domestic flows—from mutual funds, insurance (including unit-linked plans), and Employee Provident Fund Organisation—to support Indian equities and are unlikely to taper off anytime soon, he said.
Edited excerpts:
What do you see as the biggest risks for the market right now?
The domestic economy is in good shape–growth is improving, liquidity has picked up, and rate cuts should support recovery, though with a lag. The real concern is on the external front. We are witnessing rising trade barriers, like recent tariffs even on Japan—a key US ally—which shows how broad-based protectionism is becoming. Then there is the uncertainty around US-China relations; even if a deal is signed, we don’t know how long it will last.
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Geopolitical risks are unpredictable and could disrupt exports. Although these risks have been manageable so far, this may change. India has a chance to boost its manufacturing and R&D, but despite some progress and new government schemes, it still trails behind countries like China in electric vehicles (EVs) and industrial technology.
On the markets, the main concern is valuations in small caps. However, Indian markets are supported by strong, stable domestic flows—from mutual funds, insurance (Ulips), and EPFO—which aren’t going away anytime soon. So overall, I am not too worried.
Has the easing of geopolitical pressure prompted a strategic rethink? Maybe reducing exposure to export-oriented firms and leaning more toward domestic-facing ones?
We don’t know how future geopolitical events will play out. So, I don’t change my strategy based on assumptions that tensions will either escalate or ease. Instead, I focus on finding value, whether it is in export-oriented or domestic-facing companies. The goal is to maintain a balanced portfolio, rather than swinging heavily to one side. Sure, if you bet right, you could win big, but if you are wrong, the hit is just as hard.
What is your take on current valuations—do they seem stretched?
Valuations, at the headline level, look fair in large caps. However, small- and mid-caps are trading at a 20–25% premium to large-caps, so valuation in this segment is definitely a headwind. That said, it does not mean every stock is overvalued, just at the aggregate level. The universe beyond large-caps is vast and less efficient, which means that skilled stock picking matters more.
Think of it like this: large-cap investing is like fishing near the coast—calm waters, lots of competition, and fewer big catches. Small- and mid-caps are deep-sea fishing—fewer fishermen, more opportunity, but also more risk. If you’re skilled, you can catch a lot more. But if you’re not, you might just end up being lunch for the sharks.
Which means getting caught in the market turbulence?
It is not just about market turbulence; there can also be issues with the company itself, such as poor corporate governance, business model flaws, or simply picking the wrong stock. In small-caps, especially if you get it wrong, exiting can be tough. That is the challenge with this space. There are more sharks, more hidden risks. And that is where things can really go wrong.
Our approach to investing in our equity fund is that we don’t take cash calls. We don’t sell just because we have a view on the market.
What is your sell discipline?
Our approach to investing in our equity fund is that we don’t take cash calls. We don’t sell just because we have a view on the market. We believe asset allocation should be managed by the investor or their adviser. If they’ve chosen to allocate to equity, our job is to stay fully invested. That means, when we want to buy something new, we need to sell something else, typically what we consider the weakest or most inferior idea in the portfolio at that time.
There are several clear reasons why we decide to sell. One, when we have made the returns we were aiming for. Sometimes, we expect a thesis to unfold over three years, but it often happens in one. If that’s the case, we book profits and move on. Two, when we get something wrong. That includes governance issues—for example, if the management lacks transparency, we exit without hesitation. Three, when something significantly changes the industry or business dynamics, like a new regulation, a major global shift, or a new competitor that permanently alters the landscape. For example, if a regulator clamps down on a segment like F&O, companies dependent on that space could be structurally impacted, even if the regulation is well-intentioned. Similarly, if a country like the US imposes steep tariffs, exporters may suddenly become unviable; not their fault, but still a valid reason to re-evaluate. Lastly, even if the industry is stable and the business model remains intact, poor execution alone — such as consistent market share loss — can be a reason to revisit the investment and potentially exit.
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Since you spoke about market share loss, what is your take on the paints sector?
First of all, the paints sector is facing aggressive new competition, and there has also been an ownership change in one of the top companies. Both are interesting developments. Paints is a unique industry in India. One player holds a large market share, and distribution plays a big role. That makes it tough for new players to break into the market. In fact, many global companies have attempted to do so over the last 30–40 years, achieving some initial success, but have eventually struggled.
So, sustaining that is a problem?
In any industry, achieving the first 5% market share is relatively easy. There is always some low-hanging fruit. But once you start gaining more, competition wakes up, realizes they’re losing ground, and begins to take aggressive action.
Do you think the era of alpha (outperformance to the underlying benchmark) coming from fast-moving consumer goods (FMCG) staples is behind us now, with the focus shifting towards the likes of consumer discretionary and e-commerce?
First, I would not categorize all FMCG products together. Some categories, such as soaps or toothpaste, already have very high market penetration. Therefore, growth is limited to premiumization—such as whitening benefits or encouraging second-time brushing, which remains low in India. Tea is another example—people already consume a lot, so there’s little room for growth in volume.
But there are still high-growth areas within FMCG. The consumption of coffee, for instance, is increasing as people shift from tea. Chocolates too—India is a country of mithai, or traditional sweets, and chocolates are a type of mithai made with cocoa. There is a lot of room for variety and flavours. Processed food is another big space. Whether we like it or not, with less time and more disposable income, people are shifting to ready-to-eat meals—ranging from Maggi to instant poha. Double-income households want convenience.
Ice creams, global snacks like nachos with salsa, and innovative noodle flavours are becoming more popular, especially among younger consumers. FMCG growth is shifting to these new categories, while many established companies still prioritise traditional staples.
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Additionally, energy drinks and vitamin waters are gaining more prominence in the beverage market. There are areas experiencing significant growth, and current trends indicate that discretionary products may grow at a faster pace than staples, as consumption of essential goods tends to remain stable.
Tourism is a natural beneficiary; as incomes rise, people start valuing experiences more, including eating out.
Where is the incremental spending now moving towards in the discretionary basket?
Incremental spending is moving towards fashion, entertainment, and travel.
As per capita income rises, discretionary spending will shift toward premium and luxury across categories—cars, bikes, real estate. Many consumers will move from unbranded to branded products, like buying their first branded suitcase. Travel will also see a boost, with more people shifting from trains to flights and spending more on holidays and tourism. Which is what luggage makers are banking on.
Tourism is a natural beneficiary; as incomes rise, people start valuing experiences more, including eating out. That’s also where modern retailing comes in. We have shifted from traditional kiranas to modern trade and digital commerce. First came food delivery, now quick commerce is becoming a habit. What started with a few essentials has expanded into regular use, with people ordering almost everything online.
India is uniquely suited for this shift in consumption habits. Unlike the West—where cheap land, personal cars, and bulk buying are common—India has expensive real estate, high traffic, limited storage space at home, and a culture of eating fresh. Daily milk delivery and weekly vegetable shopping are part of that. So, the Western big-box model doesn’t fit here. Instead, quick commerce and hyperlocal models are likely to work better.
Thinking a little more about the medium term. Premiumization is trending, but there is a concern about demand. So how do you balance these two?
Demand in India can broadly be split into three buckets. The top end remains largely unaffected — incomes are high enough that slowdowns don’t pinch. The lower-income and rural segments, however, go through demand cycles tied to agri-income, rural economy stress, and government spending. The spending by the middle-income group is driven by inflation, job stability, and confidence. In recent years, especially post-Covid, households in both low and middle-income categories have leaned on microfinance and small personal loans to meet rising aspirations — amplified by social media and influencer trends. But this has led to some stress, with even bankers flagging early signs of strain. As the economy stabilizes and rural indicators improve, especially with policy support and a good monsoon, demand recovery should follow.
Which sectors do you see holding the most exciting opportunities?
The biggest sector with opportunities is BFSI (banking, financial services and insurance)—a large and diverse sector, good fundamentals, and reasonable valuations. Next is pharma and healthcare, with solid fundamentals and acceptable valuations. Beyond that, we find pockets of opportunity mainly in consumer discretionary, which is a mix of hotels, real estate, paints, alcohol companies, brands, airlines, and more — a heterogeneous set of businesses.
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So moving on, how would you draw the line between diversification and dilution?
So, dilution only happens if you cannot invest with quality research. If you are a small team covering too many stocks, then yes, it is dilution. But if you have a large team, owning more stocks actually adds alpha, not dilution—especially beyond the top 250 names, where competition is lower and fewer analysts track those companies. In small- and mid-caps, the alpha potential is higher if backed by strong research.
Do you think expanding the stock universe could be a smart way to uncover more alpha opportunities?
Exactly, that’s our core belief: the deeper you go beyond the top 200 stocks, the less competition you face. Fewer investors track these names, which creates alpha opportunities. We aim to play well at the top, but the big alpha often lies deeper in the market.
What’s your outlook on gold? You recently reduced your exposure—does that signal a shift in how you’re viewing the markets ahead?
We cut our gold exposure not based on judgment but through our model, which compares gold valuations relative to interest rates, the dollar, and equities. As gold rallied, it became less attractive versus equities, so we rebalanced accordingly, shifting profit from gold into equities.
An important point to note would be – while most focus is on equities (just 15% of total wealth for most people), the bulk—85%—is in real estate, gold, FDs, and insurance. If people can improve returns slightly on that 85%, the overall impact on their financial well-being would be far greater than trying to outperform within equities alone.
