Earnings downgrades of India Inc. continue amid slowing economic growth domestically and global trade uncertainty, but UTI AMC’s chief investment officer sees an improvement for Nifty 50 earnings in the next fiscal year from the mid-single digit consensus forecast for FY25. Vetri Subramaniam cautions, though, that his expectations are tempered by economic growth running at a nominal 10% and limited scope for margin expansion. Hybrid funds like Balanced Advantage Fund and Multi Asset Allocation Fund should be the investor’s top choice for navigating turbulent market conditions. Global trade uncertainty fallout can’t be ascertained on market earnings currently but could weigh on valuations, he thinks.
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How have your equity funds’ NAVs performed in the Oct-Jan period of the correction in broad indices like the Nifty 500 and a bear market in smalls and midcaps (Smids)?
Our equity funds have navigated the drawdown and increased volatility in the equity markets quite well relative to their respective benchmark indices. Our investment process emphasizes operating cash flows and return on capital ratios. From a valuation perspective, we have been concerned that the markets were overestimating sustainable growth for many businesses and many stocks were backed only by narratives without fundamental support. This caution has worked to our advantage during this selloff.
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Corporate earnings in Q3 saw slower revenue growth for Nifty 50 and Nifty 500 companies, but lower input costs aided Ebitda. Also, there seems to be an improvement in government spending. Do you expect an improvement in FY26 over FY25 in terms of both economic growth and earnings, given the ambient global tariff tensions?
The economy has slowed in recent quarters, which is now visible in revenue and earnings trends. We expect an improvement in growth in FY2026 from the mid-single digit forecast for consensus Nifty 50 earnings in FY2025. However, our expectations are quite measured—nominal GDP growth is running at 10% per annum, and the scope for margin expansion appears limited. The government’s improvement in capex and enhanced fiscal transfers from states are positive factors. An improvement in liquidity and an increase in credit growth would be even more supportive of growth. The ambient trade and tariff war is fracturing the global trading system and supply chains. Nobody knows how this will impact earnings. However, this will likely weigh on valuations.
Are you seeing any stress in SIP flows because of the prolonged correction?
We don’t see any change in trend at this point. The investor base has witnessed a rapid expansion over the past decade. We think investors recognize the importance of long-term investing and the need to ride out market volatility in the short term. However, we also know from experience that investor behaviour can be pro-cyclical in terms of risk appetite. Our effort is to double down on investor education and to handhold them during this period.
Are you going to invest more now or prefer to sit on more cash than normal? If yes or no, can you elaborate on the logic of your actions?
As a philosophy, our equity schemes run with fully invested portfolios, and we do not use cash calls to generate alpha. Mutual fund schemes operate downstream of the asset allocation decisions made by investors based on their financial goals. A pooled investment product such as a mutual fund scheme cannot incorporate the unique asset allocation needs of diverse investors.
As an investment manager we offer a range of hybrid strategies in which we take responsibility for asset allocation within a range, based on our proprietary model. These are appropriate for investors who want us to manage asset allocation in the scheme. These hybrid products have lower volatility and offer a more efficient way to rebalance between asset classes. The range of hybrid funds includes multi-asset allocation funds (MAAF), balanced advantage funds (BAF) and also equity savings funds.
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What’s the investment preference, large caps over Smids or do you feel the recent sharp correction has made some of the latter stocks look more compelling from an investment point of view?
In the middle of 2024, all segments of the market were trading in the expensive zone. After the correction from the peak of September 2024, the large caps reflected by Nifty 50 valuations are now in the fair valuation zone. This is our preference, though we also note that large caps are not yet in, what can be characterized as, the cheap zone. Fair value territory provides us with enough comfort to venture into large caps on a staggered basis. However, Smid caps, based on their respective index-level valuations, are still trading at rich valuations compared to their historical averages. There are select bottom-up opportunities in Smids, but this is our least preferred market segment in a top-down approach.
The preference for a sector is a function of the scheme’s distinct investment strategy. We do not follow a single-size-fits-all philosophy.
Which sectors do you prefer, or are you following a stock-selection approach?
The preference for a sector is a function of the scheme’s distinct investment strategy. We do not follow a single-size-fits-all philosophy. Right now, our interests are better served by stock-level opportunities than at a sector level. As an asset allocator, I see the financial services sector as an attractive pocket based on valuations that we believe underestimate future growth prospects. Also, the balance sheets of banks are in good health. We believe the banks are well placed to gain momentum despite near-term challenges of net interest margin (NIM) compression and slippages in the unsecured lending book.
What is the advice to retail: to move to multi asset allocation funds or balanced advantage funds under the current market conditions?
We find the MAAF and BAF categories of funds to be attractive for investors in the current market conditions. Equity allocation is a function of valuations and is currently around the mid-point of its range, slightly below 65%, based on our proprietary asset allocation model. This reflects the large cap valuations being in the fair value zone. If equity valuations are correct, the equity allocation will increase further. We find the current carry in fixed income attractive, with high-quality portfolios yielding over 7% and inflation for the year estimated at 4.5%. This combination makes the multi asset allocation and BAF schemes an appropriate choice in the current market.
Why choose passive fund investing at a time when indices are under pressure…
Passive funds are a simple and efficient method of investing. Their objective is to generate returns similar to the underlying index. They do not attempt to outperform or underperform the market. In active funds, there is the possibility of significant variation in performance compared to the index—it could be positive or negative. Hence, there is a significant degree of selection risk. We believe active and passive investing can play a role in an investor’s portfolio in balancing efficiency and returns.
How is the country’s oldest passive fund faring?
UTI Nifty 50 Index Fund is the largest and oldest index fund in the country, with over ₹20,000 crore AUM and a 25-year track record. The fund has over 8.5 lakh investors as of date. This fund has the lowest tracking error, i.e. deviation versus index, in the last 5 and 10 years within the category.
