Madhu Nair, CEO, Baroda BNP Paribas Mutual Fund, shares his views on valuations in the Indian equity market, the outlook for foreign investor inflows and the sustainability of SIPs in an interview with Kushan Shah. Excerpts:
How do you look at valuations in the current market?
Valuations are comfortable. The price-to-earnings (P/E) and price/earnings-to-growth (PEG) ratios are much lower than their historical averages, especially in the large-cap space. We saw 20-25% year-on-year earnings growth in Q1FY27. Due to the base effect, earnings growth may average 12-15% year-on-year for the rest of the fiscal, depending on how the West Asia conflict plays out.
As around 75% of the earnings of BSE 500 companies are derived from domestic consumption, India is relatively insulated from the impact of geopolitical conflicts.
I believe this is a good entry point for investors with a five-year horizon, as investor returns can fare much better than earnings growth because of attractive entry valuations. Over the next five years, investors entering equity mutual funds now could be well positioned, as markets are coming out of a period of depressed earnings even as the outlook remains attractive.
How do you view the decline in investor interest in active large-cap schemes and increasing inflows into riskier categories such as mid- and small-cap funds?
While over 60% of active large-cap schemes outperformed their benchmarks last year, there is a belief among distributors that generating alpha consistently will be difficult in the category. As a result, they are advising investors to take passive exposure to large caps and active exposure to mid- and small-cap schemes for alpha generation.
I think that with the right stock selection and conviction on the part of the fund manager, it is still possible to generate consistent alpha in large-cap schemes.
That said, in any growing economy, mid- and small-cap companies will grow much faster. So, even with elevated valuations, greater alpha can be created in mid- and small-cap funds over the long term. It is also important to note that while large caps are trading below their average P/E multiples, valuations in mid and small caps have also moderated. While the Street narrative has favoured large-cap funds, returns have been better in small- and mid-cap funds.
How do you see mutual fund participation in the recently introduced closing auction session?
The closing auction session is a good global practice that aids price discovery. It has been only a few days since its introduction, and our operational mechanisms are still adapting to it.
There are some initial structural and operational issues — such as capturing spreads while the cash market is closed and the derivatives market remains active — that are affecting liquidity. As a result, mutual fund participation is still low.
However, I believe that over time, mutual funds, being among the largest participants in the ecosystem, will increase their participation in the auction.
Do you see the high inflows into SIPs sustaining in the coming years?
There are two growth levers that make SIP inflows sustainable. The first is the increase in the mutual fund investor base, which leads to new SIP registrations. This will continue as financial awareness and market participation increase.
Investor behaviour, shaped by past experience, will also drive SIP growth. As investors see that SIPs provide a better investing experience during volatile periods compared with lump-sum investments, SIPs will grow exponentially.
Some investors who lack conviction may redeem early, but those who stay the course and create wealth will bring more investors into SIPs. I expect net monthly SIP flows to touch Rs 40,000 crore in the next two years or so, and, within my working lifetime, to scale to Rs 1 lakh crore a month.