Higher valuations in small-and mid-cap justified: Edelweiss Mutual Fund’s Radhika Gupta

How do you see the current market?

The index has been flat for the last two years, but that is part of the equity-investing journey. It feels particularly difficult because it follows strong post-Covid returns, while markets such as the US, South Korea and Taiwan have performed well.

India’s macros, however, remain in good shape. Inflation is reasonable, corporate profitability is improving, domestic markets remain resilient despite heavy FII selling, and valuations have moderated.

Global geopolitical uncertainty remains difficult to predict. Crude continues to be India’s Achilles’ heel, underscoring the need to diversify energy sources. India is also seen as an anti-AI trade, though it could benefit from the rollout of AI infrastructure.

With US Treasury yields around 5.2%, significant capital flows to other markets may take time. Our internals have improved, but the externals will play out gradually.

How do you view the disproportionate investor interest in riskier segments such as mid- and small-caps?

I think we need to change our notions of large-, mid- and small-caps. We tend to think of mid- and small-caps as riskier segments, but the large-cap universe is dominated by sectors such as IT, banking and energy.

If you look at some of the major themes in the economy and companies with more disruptive business models, many of them sit in the mid- and small-cap universe. That is also where much of the growth is, which explains why investors are flocking to these segments. If you look at the PEG, or price/earnings-to-growth ratio, the growth also justifies the higher valuation multiples.

Could strong inflows once again inflate valuations, as they did two years ago?

Given the price/earnings-to-growth multiples, I think we still have some way to go. There will always be periods of froth and periods of opportunity. Part of the growth story is also structural, given the increasing share of mid- and small-caps in the overall market capitalisation.

Do you see prospects for large-caps improving in the near term?

Large-caps will always be an important part of investors’ portfolios. If you look at index returns, they have delivered good returns over the long term. But there are also two- or three-year periods when the index does very little, so what we are seeing currently is normal.

Even within large-caps, the real drag has come from the top 50 companies, while the next 50 have done well. There are also some positive signs within the large-cap universe. Banking is looking good as credit growth returns. IT valuations have become supportive, but earnings growth needs to turn around. There is nothing fundamentally wrong with these companies; growth momentum simply needs to return. For now, we are in a wait-and-watch mode on the sector.

SIFs have completed a year and seen strong growth. What is your outlook?

I have been pleasantly surprised by the growth of SIFs. It has surpassed my expectations, given the limited investor experience with the product and the relatively small number of distributors with the required certification.

As both these parameters improve, I would not be surprised if the industry scales up very rapidly over the coming years. The catalyst has been the ability of SIFs to create solutions that meet investor needs and deliver extraordinarily well despite the underperformance of the indices. If they continue to do that, SIFs can maintain the pace of growth we saw in the first year.

Does the SIF product basket need to expand?

The regulator was sensible in allowing seven scheme options across asset classes rather than 20. Measures such as not allowing leverage or short exposure in commodities have also ensured that investor needs can be met while keeping risks calibrated.

I hope the regulator gradually opens up SIFs further. They do not need as many categories as mutual funds. Many SIF schemes are still relatively small in terms of assets under management and will need time to build scale.

Is the commission-based distribution model under pressure as margins decline?

Structurally, margins have come down in both distribution and asset management. At the same time, volumes have grown tremendously. We are seeing double-digit volume growth in India compared with 2-3% in developed markets.

Building sustainable businesses will therefore require a balance, and efficient business models will become increasingly important in both asset management and distribution. This will require smart use of technology, especially AI, along with a focus on client acquisition and volume growth.

I believe different distribution models will continue to coexist. The newly introduced PRIM framework is also a fantastic opportunity for advisory because it addresses the challenge of collecting fees. Distributors now have multiple models and client offerings to cater to different needs.

Could the current market volatility put pressure on SIP inflows?

There are both structural and cyclical elements to the SIP growth story. A large part of it is structural because SIPs are an effective savings mechanism in a country with a large salaried population.

There will inevitably be some stoppages and cancellations during periods of volatility, but I expect the impact on the overall SIP book to be marginal.