Good time to start SIPs: ICICI Prudential AMC's Sankaran Naren explains why markets are more attractive now

Veteran fund manager Sankaran Naren was among the first to sound alarm bells when the broader market experienced excesses in 2024. More recently, he cautioned that silver was akin to a small cap stock and should not be treated as an asset class. Now, he is calling for a shift in stance on equities but warns against expecting post-2020 market returns. He also explains why he places emphasis on macro calls and how his value philosophy has evolved over the years.

Your valuation indicator is now flashing green, for the first time since 2020. What does that mean for your fund strategies and investment calls?

As far as our equity funds are concerned, they are meant to remain invested in equities. They remain so, whether valuations are high or low. However, in funds such as the Balanced Advantage and our Dynamic Asset Allocation Fund of Funds, equity allocation is currently among the highest levels seen in the last three years. This is because our indicators suggest equities are more attractive today compared to the last three years.

From an investor perspective, history shows that when our equity valuation index (EVI) moves into the green zone, the probability of long-term profit improves compared to the neutral or red zones. After emphasising asset allocation for a long period, in our previous communication with distributors, we recommended that investors can start systematic transfer plans (STPs) into equity and can consider deploying one tranche of their investment immediately. Since then, markets have rallied owing to improvement in geopolitical conflict resolution. We believe investors can consider initiating SIPs as markets are not very expensive. Historically initiating SIPs during such times tend to be beneficial for long term wealth creation. However, one has to be mindful that any development which hampers peace talks can lead to intermittent volatility.

RAPID FIRE

Q.One investing rule you never break?
Always think of the investor first. Fund management is probabilistic, and mistakes can happen, but the investor must always come first.
Q.A fund manager superpower you wish you had?
Foresight.
Q.A trend you think investors are underestimating?
Investors underestimate how difficult it is to consistently generate 15% annual returns. Many assume such returns come easily.
Q.One investing myth you would like to bust?
The risk in equities is highest at the bottom. In reality, risk is usually highest at the top and lowest at the bottom. Risk is often inversely related to past returns.
Q.A call you were early on and still convinced about?
Many US technology stocks are overvalued.
Q.The toughest decision you had to take as a fund manager?
During 2008, when redemptions happened near the market bottom, we had to sell stocks at very low valuations—stocks we would have preferred to hold.
Sankaran Naren
ED & CIO, ICICI Prudential Asset Management Company

You are suggesting a calibrated entry?

Yes, it is a calibrated entry because markets are not as cheap as they were in March 2020. “This is a good time to initiate SIPs. But do not expect post-2020 returns” Geopolitical risks still remain. So while valuations are more comfortable, triggers for strong market returns will depend on how global events evolve. Our framework examines valuation, cycles, sentiment, and triggers. Valuations have improved, but triggers will depend on geopolitical developments.

After a long time, we have seen both price and time corrections. What kind of returns should investors expect?

Many investors believe we are in a 2020-like opportunity (Covid-crash), but we are not. The 2020 market was cheap, investors were underinvested, and there was significant operating leverage across industries. That environment does not exist today.

While markets are more attractive now, we do not expect outsized returns like those seen post-2020. Globally, too, markets were near all-time highs in 2025, so the possibility of outsized returns is very low. The 3- and 5-year returns are already reasonable. Convincing investors that this is not 2020 remains a challenge.

What are the big macro calls you are making now?

Energy prices are unlikely to return quickly to 2024–25 levels because supply disruptions from geopolitical conflicts may take time to normalise. This could mean elevated energy prices, a weaker-than-anticipated rupee, and consequently, a reduced likelihood of meaningful interest rate cuts. In such an environment, exporters benefit from currency movements, import-substitution sectors tend to gain traction, and currency trends become an important factor.

Any specific sectoral themes you prefer now?

Six months ago, we did not have strong sectoral preferences. Today, our views are clearer. We are relatively positive on export-oriented segments such as Information Technology (IT) services and pharmaceuticals. Within energy, we are constructive on refining, upstream companies, and the power sector appears well-placed, supported by rising demand and its increasing role as an alternative to oil. These sectors appear to be better positioned in the current global environment.

What’s your view on midcaps and small caps?

Midcaps have not seen a meaningful correction due to strong SIP inflows and limited stock supply, and remain relatively expensive. In small caps, although SIP inflows continued, there has been significant supply through initial public offers (IPOs), qualified institutional placements (QIPs) and new listings. As a result, small caps corrected, creating stock-picking opportunities. They are not extremely cheap, but select small-cap opportunities exist.

Overall, the risk-reward between largeand small-caps appears similar, even though risk is lower in large-caps. On midcaps, I remain cautious. Our midcap fund manager is more positive than I am. My concern is that valuations have not corrected enough.

Large inflows and limited free float have driven valuations higher in midcaps. It becomes an argument about liquidity and flow versus supply. It is difficult to predict whether midcaps will underperform, given that inflows continue and the universe is limited to 150 stocks.

In contrast, the small-cap universe has expanded significantly, and large-caps have seen new listings and selling by foreign institutional investors (FIIs). These factors explain the relative differences.

Your investing style is often seen as macro-driven. What has shaped this approach?

This comes from experience. Around 2005- 08, after losses in the infrastructure fund, we introspected deeply. We realised the issue was not stock picking but a lack of macro understanding. We, therefore, built a macromicro framework. When managing large amounts of public money, this framework helps. Macro investing is difficult because outcomes are uncertain. Even today, we cannot predict geopolitical developments.

Micro gives more clarity because you can interact with companies. Macro involves probabilities. But since fewer investors focus on macro, it can sometimes provide an edge, not because you always get it right, but because you consider additional risks. We never abandoned bottom-up investing. We simply added macro analysis because we manage public money.

Value investing has undergone changes in interpretation over the years. How has your thinking evolved?

Over time, it has evolved significantly. Earlier, we focused on low P/B (price-tobook value) and low P/E (price-to-earnings) stocks. This led us to sectors such as fertilisers, paper, textiles, and plantations. Many of these did not deliver returns even over long periods. We realised traditional value metrics alone were insufficient. We moved towards quality-oriented value investing, influenced by Warren Buffett and Charlie Munger. This helped us identify better businesses even if they were not optically cheap.

The next evolution, more visible in the United States than in India, is the valuation of technology companies and intangibles such as Research and Development (R&D) and intellectual property. That stage is still evolving in India and will require further refinement in our approach.

With faster cycles and quicker price discovery today, does value investing also need to adapt?

Shorter cycles have helped because triggers play out faster due to strong institutional flows into equities. Earlier (1995-2004), value unlocking took much longer due to limited flows. Today, triggers can play out faster, but we remain mindful that slower periods can return as markets move in phases.

Momentum investing, which is contrary to the value philosophy, has gained ground. How do you view its rise?

We studied this and recognised that earnings momentum works well. Based on this, we launched an active momentum fund focused on earnings rather than price. Our experience thus far has been encouraging.

If a sector consistently delivers earnings surprises, it tends to perform well. So we focus on earnings trends rather than price movements. For example, after the geopolitical developments, we reassessed where earnings momentum was improving or weakening and adjusted allocations accordingly. We do not believe in price momentum, but in earnings momentum.

How has the operating environment for fund managers changed amid more regulation and scrutiny?

Assets under management have grown substantially, so scrutiny is natural and welcome, given that we are managing public money. Strong regulation and media scrutiny have helped the industry grow to its current scale. However, during extremes, when markets become irrational, fund managers must sometimes take contrarian positions and explain their rationale despite scrutiny. For example, we tried to explain risks in silver earlier this year. Even if such calls are unpopular with investors, we must communicate risks clearly.

How do you see ICICI Prudential Mutual Fund’s strategies evolving? Is Artificial Intelligence (AI) already shaping processes?

As scale increases, continuous improvement becomes critical. We often refer to the Japanese concept of Kaizen, which stands for continuous improvement. We must keep improving our research, fund management, dealing, and investor communication processes. Investing is not just arithmetic. Mistakes will happen, but processes must improve continuously. As global events increase, decision-making and internal communication also become more important.

We are not using AI for decision-making yet. However, we use it for quick transcript summaries, faster information processing and portfolio insights. Technology has improved the speed and efficiency of inputs. AI currently supports decision-making rather than replacing it.