How different is this market fall from other falls?

The number of investors has exploded in the past five to six years, be it in the secondary market or the people who have come to us via mutual funds. I worry about such a big explosion. More investors are good, but did everybody really understand what they were signing up for in terms of risktaking ability?

Sometimes, you only realise your risk-taking ability when it becomes a lived experience. Textbooks and reading about others’ experiences don’t do it.

The market fall this time, the percentage drops in stock prices, the time over which they have dropped, isn’t unusual. We have seen multiple falls like this. Once every 18 months, a 10% fall in the equity market is natural. Once every two-three years, a 20-25% pullback is natural. Once a decade, a 40-50% fall is natural. Even before the pandemic, between January and October 2018, the mid- and small-cap indices went down by 35–40%. The damage during those 10 months was not very dissimilar to the kind of damage we have now started seeing over the past five months.

The only big difference is the widespread participation in the market from investors, and the fact that the mantle of being really expensive actually went to the mid-cap and small-cap space. It wasn’t really the large caps. Not that the large caps didn’t become expensive, but it has been the only time in my career where I saw small-cap stocks getting more expensive than even large caps.

Did you lower the exposure in small caps in your flexi-cap funds?

Our flexi-cap fund has always been run with a bottom-up thought process. There was no particular thought process about bringing a top-down framework that lends to cutting exposure to mid-cap or small-sized companies. We stuck to our philosophy, though we did take money off the table where valuations had become expensive. Some top-down strategies, like the value and focused funds, reduced small-cap exposure even before the market downturn, despite the pain of watching the markets rise at the time.

How damaging are US President Donald Trump’s tariff policies going to be for global and Indian markets?

The reality is that none of us know the short-term or long-term impact of these trade and tariff policies.

What we know is that these are very significant disruptions to the way in which we have come to understand global trade and global supply chains historically.

Nobody knows how next quarter’s corporate earnings would be impacted or, more importantly, over the next five years. At the most basic level, companies or businesses that are more exposed to this risk will see their share prices fall as the markets become adjusted to reality because of these tariff and trade tensions. I worry that this can actually cause a dramatic slowdown in capital investment and risk-taking by entrepreneurs across the world.

Entrepreneurs becoming risk-averse is perhaps the biggest economic risk we face today. That, eventually, translates into concerns on the part of consumer sentiment as well, and that might lead to a recession.

RAPID FIRE

Q.An investment tip you’d have given your younger self?
Don’t focus on picking ‘best’ companies. Just make sure you don’t have the losers that take you to cleaners. In compound interest formula, focus on ‘n’, not ‘r’.Q.Is luck required to become a good fund manager?
Yes, significantly. You need good mentors and good people in the early days. Markets, in early days, also play a big role in shaping fund managers.Q.Are you debt-free?
YesQ.If your investment strategy were a movie, what would it be called?
‘The Pursuit of Happyness’Q.If you weren’t a fund manager, what would you be?
I dreamt of joining the military, but weak eyesight thwarted my plans.Q.If you would invest only in one investment for life, what would it be?
Health

What if that happens?

If the US goes into a recession, that would be a very nasty place to be in. Europe is still struggling with economic growth. China is struggling with economic growth. Japan is better than its past, but really not an engine of global growth either.

The US economy was, perhaps, the only one doing well on a global scale. If that goes out, it’s something that the markets worry about; it might actually start to become a real issue. That will certainly impact the earnings.

What is your assessment of risk in today’s markets? What should investors do?

The risk is not as high as it was, maybe, six to eight months ago. However, we are still in a place where you should prioritise risk management. There are two or three ways to cut this.

One, you are better off with hybrid strategies. The yield from fixed-income instruments is still good, around 7% from high-quality scrips. A hybrid fund also has a significant exposure to large-cap equity. That’s fair value territory. Two, you can look at large-cap mutual funds. Stagger your investments. As a fund manager, I like the banking and finance sector. Comparatively, UTI Small Cap Fund has done reasonably well in this market fall.

Yes, absolutely. That is because we have been conscious of the narrative and of where we are putting our money. We’ve paid close attention to valuations, quality of businesses, cash flows, and return on capital.

How has your stock picking changed in this market crash, which has been happening since September 2024?

The biggest challenge for the past two years has been the speed of initial public offers (IPOs). It, typically, takes 10-15 days to frame an opinion about the stock after analysing its balance sheet and financial statements. There is more rigour in analysing an IPO. However, out of say 100 IPOs, we end upinvestingin 15 of them. That’s a small fraction for the amount of effort we put in. But we can’t ignore them, as many aren’t tiny companies and can be quite dominant.

How many fund managers and analysts do you have?

About eight fund managers, eight senior analysts, and five associates, as of now. Over the past year-and-a-half or two, we have grown increasingly concerned about stocks driven by narratives rather than fundamentals—those lacking strong cash flows or sufficient return on capital, either the kind of cash flows the company ought to have or the return on capital it should have.

Our view of sustainable growth for many such businesses is far lower than what the market has priced in, making risk management our top priority. Therefore, that’s where I would say we have been most careful. We need to raise our ante on risk management and pretty much do the opposite when valuations become very cheap, because then the market is already factoring in a far more difficult environment for businesses. That’s when we should give companies the benefit of doubt that conditions may improve. Our job is to think slightly counter-cyclical.

What about portfolio churn?

UTI MF’s portfolios don’t churn much. Some of our larger schemes run at 15-20% annualised portfolio turnover ratios. The most aggressive schemes are at 55-60% (portfolio turnover ratio). We don’t look at churn as a source of alpha creation.

You have been a long-time proponent of value philosophy. Does that still hold true in your case? Some of your fund managers, like Ajay Tyagi, bat for growth philosophy.

Yes, absolutely. Right from the time I joined UTI MF, our thought process has been to offer a wide range of investing strategies, like a supermarket.

So, while Ajay manages his funds with a quality growth-oriented strategy, others like Amit Premchandani and V. Srivatsa manage our value-oriented funds. There is no one way to make money. I think all investing frameworks have a place; it is how you navigate that cycle and stay true to discipline that matters. You have to make some course corrections, but how you stay true to discipline is what determines your outcomes over long periods of time.

As a value fund manager, have you got any good pickings in this market fall?

Not yet. The one area that we thought was attractive, even 6-12 months ago, was largely the banking and financial services space. It’s held on reasonably well through the fall, but I won’t say it has really started to create any great value. A few bottom-up (stock-picking) opportunities here and there can be seen, but the market has not sold off in a way that I can go shopping for sectors and stocks in a big way. That has not happened.

Where should you invest Rs.10 lakh today if you have it?

One advice can’t work for everybody. However, if I look at ourasset allocationmodel, we are now invested around 60-63% in equity.

The big lesson that I have learnt in my career is that one should stay with diversified funds that are invested across the broader market and various market capitalisations. That is the only source to create wealth over long periods of time. Banking and financials is a tactical allocation, not a recommendation.