Don't foresee risk of large-scale SIP outflows, says Aditya Birla Sun Life AMC's Mahesh Patil

Patil cites data indicating that the median stock in the broader market (BSE 500) has fallen more than 37% from its peak, a level at which markets tend to bottom out during a normal correction phase.

He also doesn't expect large-scale outflows from mutual fund investors. Data shows that out of the past 20 episodes of market corrections, 17 of them have seen systematic investment plan (SIP) inflows higher than the previous 12-month average.

Edited excerpts:

There has been a recovery in Q3 GDP but relative to FY24, there is a slowdown, coupled with slower earnings growth and a rise in global trade tensions. How will Indian markets perform given that valuations aren't exactly cheap, and we are close to the election results-day low?

The slowdown in the economy, we believe, is cyclical and not structural. Some of the factors leading to the slowdown are reversing. Firstly, the sharp contraction in budgetary spending seen in the first half is normalizing. Secondly, in the budget after focusing primarily on addressing the supply-side reforms for the last five years, for the first time there is a shift to focus on the demand side by giving a boost to consumption. Thirdly, the monetary policy is also likely to be less restrictive and is likely to support growth.

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Post the recent correction in the market, the valuation of Nifty is reasonable and slightly below the 10-year average, which makes it a good entry point for long-term investors. While the sentiment is still weak and the market can still undershoot on the downside, it should not stay there for long. A lot of the froth in the markets has been sucked out, as data suggests that the median stock in BSE 500 is down more than 37% from its peak, which is a level where most of the time the markets tend to bottom out in a normal correction phase, except during corrections induced by events like Covid- or GFC (the global financial crisis of 2008-09). In the first half of 2025, the market may be rangebound with periods of short rallies and selloffs. As the growth outlook improves in the second half, it should bottom out and trend higher.

However, the market breadth could take some more time to recover as investor confidence slowly returns. The recovery will first happen in the large-cap space, which will also be the first port of call for FIIs (foreign institutional investors) when they start deploying in the market.

Do you see a risk of systematic investment plan or SIP outflows if the correction extends?

Data shows that out of the past 20 episodes of market corrections, 17 of them have seen SIP inflows higher than the previous 12-month average — in recent times, only during Covid did the SIP flows fall. Another trend we are seeing is that household equity ownership continues to get institutionalized through the mutual fund route as the direct retail share of BSE500 companies fell to near-record lows due to net selling. In the last month, for the first time the total new SIP subscriptions were slightly lower than the stoppages. Hence, we may not see a secular increase in SIP flows in the near term if the market sentiment remains weak. However, I do not foresee large SIP outflows as investors typically do not like to book losses but to wait until they break even.

How does an investor diversify the portfolio under the given circumstances?

We expect the returns across asset class including equity, fixed income, gold/silver and Reits (real estate investment trusts) to be reasonable on a risk-adjusted basis. Hence, it would be advisable for investors to follow a proper asset-allocation approach to reduce the volatility and benefit from the return each asset class has to offer. The best way to do this on the mutual fund platform is through a multi-asset allocation fund.

We have seen a significant correction in small- and mid-caps (smids). Despite that, inflows into these categories of mutual funds remained inline until January. As an investment expert, how do you deal with this?

In this correction phase, it is important to first look at the margin of safety when buying any stock to deploy fresh inflows. While it is true that mid- and small-cap indices are still relatively expensive compared to their historical average multiples, there are many stocks which have corrected by 30 to 50% and are now at reasonable levels. It’s the time to be very stock-specific, evaluating each stock in relation with the growth and valuation framework to see where the risk-reward is favourable. The bias has to be towards quality to protect the extreme drawdowns. We are seeing value emerging in large-caps as well as in select mid- and small-cap stocks. Hence, as an investment professional, I see this as a good time to reshuffle the portfolio and very slowly add risk to generate long-term alpha.

Do you see any shift happening in flexi and multi-caps toward large-caps at the cost of smids?

The shift towards large caps from smids would have happened to a large extent during the last couple of quarters as most fund houses and fund managers have been worried about the valuations in smids and the potential risk. Now that we have seen a significant correction in smids, the incremental scope to move to large-caps is not much. Having said that, any incremental flows in the fund is more likely be deployed in large-cap stocks with reasonable valuations. This is a time to keep your bucket list of stocks ready to buy in the smid space where the conviction of earnings is high and the risk-reward has begun looking favourable.

What do you make of the earnings thus far; any scope of improvement in FY26 and FY27?

The earnings for the first nine months of FY25 have been weaker than expectations, with a mid-single-digit growth for Nifty. As a result, we have seen downgrades to Nifty FY25 earnings from about 16% expectations at the beginning of the fiscal year to around 6% growth. The earnings growth has been driven by the BFSI (banking, financial service and insurance) sector, followed by technology, telecom, healthcare and capital goods, while it was hindered by global cyclicals such as oil and gas, along with cement, chemicals and consumer sectors. After three years of strong earnings growth between FY21 to FY24, which ran ahead of topline growth, this year has been a year of reset. With most of the downgrades behind us, we should expect earnings recovery from Q1 FY26 on a lower base and GDP growth moving back to around 6-6.5%. We expect low teens earnings growth in FY26 and FY27, which should be slightly higher than the nominal GDP growth.

What are your preferences in large cap space?

Among large-caps, we like private banks and NBFCs (non-banking financial services companies) as the regulatory environment is beginning to be relatively benign and having gone through a phase of underperformance with lowering of ownership by FIIs. The insurance sector, too, has gone through some regulatory headwinds, but we are now seeing growth steadying out and valuations are comfortable. Large cap IT companies are also expected to see recovery in FY26, though topline growth would still be in mid- to high-single-digit; margin expansion, partly due to rupee depreciation, can drive higher profit growth. Among the defensives, utilities are also looking good on valuations as is also domestic pharma and healthcare. Consumer discretionary and retail sectors are also expected to do well as the budget sop benefits start to trickle down from the next fiscal year. Some of the dark horse sectors to look out for would be cement and metals.

A significant portion of the new fund offers (NFOs) launched in 2024 are for thematic funds whose net asset values (NAVs) are under pressure. As a fund house what's the view?

Investments in thematic funds is always riskier than diversified equity funds. The recent market correction, wherein the breadth has weakened significantly, is witnessing large drawdowns from thematic funds. Investors in these funds need to evaluate the themes carefully to access their potential over a three to five-year period and make necessary changes in their allocations. Once this is sorted, investors need to give sufficient time for the theme to play out to get the desired results. As a thumb rule, we would advise a normal investor to keep their thematic exposure across funds below 25% of the total portfolio allocation.

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Do you see the IPO pipeline tightening from what we saw last year?

Last calendar year was a bumper year for new IPOs, both in main market and the SME (small and medium enterprises) segment. The demand for IPOs was driven by the large inflows from domestic investors and the potential listing gains. However, the picture has changed now with many IPOs now quoting below their issue prices and a weak market sentiment. In this environment, we expect fewer IPOs to hit the market. The expectations of promoters on valuations also need to be tempered down to make it attractive for investors. This change in mindset will take some time and could delay some of the IPOs in the pipeline. The market is also becoming more discerning and, hence, only good quality IPOs with reasonable valuation would sail through.

Global trade tensions are only increasing with each passing day. Given the possibility of reciprocity of tariffs and average weighted tariff of India being on higher side on US imports, how will this impact sectors and markets?

We will get a clearer picture on the tariffs only in the next few months; until then the sword of reciprocal tariffs will weigh and investors will be wary of a few companies in sectors like auto ancillaries, pharma, and industrials, which have relatively substantial exports to the US. That said, India will also have to lower tariffs in a few sectors to bridge the gap. The Indian market is very different and is price sensitive and, hence, despite lowering tariffs we do not see much competition in sectors like automobiles, pharma, etc. where our cost structures are much lower. We do not see a material impact on the overall earnings as a result of this and once the dust settles, markets will look beyond, and the uncertainty and risk premium will also disappear.