As the market sees a surge in thematic passive offerings alongside strong inflows into small-cap funds, Anupam Tiwari, the head of equities at Groww AMC, outlines why narrow themes suit evolved investors better and how the fund house balances its strategy through a quality-growth framework.
In a conversation with Mint, he discusses passive fund dynamics, small-cap valuations, global risks, and asset allocation frameworks.
In passives, there are three main categories: pure index funds for investors seeking low-cost broad exposure, thematic funds, and sectoral or niche funds.
In narrow thematic and sectoral categories, active fund management often struggles to add efficient value for two reasons. First, the universe of stocks is very narrow, such as in defense, where only 15 to 17 stocks can be meaningfully bought.
An active manager cannot differentiate much here and faces high risks of underperformance relative to heavily skewed indices. We believe passives are better suited for narrow sectors or themes. The only exception we made for an active fund is in banking and financial services, where the universe is wide enough.
For a standard retail investor, most sectoral or thematic funds are unnecessary. No single sector compounds consistently over a 10 to 20-year period without going through cycles, and timing those cycles is nearly impossible for a general investor. They are better off sticking to broad, diversified index funds.
These niche products target structural growth areas in the Indian economy. For instance, healthcare and hospital demand is rising due to expanding health insurance coverage, growing per capita income, and India's low baseline of hospital beds per capita. Similarly, electric vehicles represent a multi-year transition as regulatory pushes and infrastructure reduce internal combustion engine market share over time.
However, these structural themes come with high volatility and cyclicality. They are primarily designed for knowledgeable investors who understand industry cycles and risk-reward dynamics. For a general retail investor, total exposure to thematic or sectoral funds should be strictly capped at 5% to 10% of their overall portfolio.
Valuations have certainly risen over the last 12 to 18 months. When we advocated investing in small caps over a year ago, interest was low, but sentiment has turned sharply positive now. The Q1 earnings numbers played a key role here.
Retail behaviour often follows past performance; just as we saw with the recent buying frenzy in gold funds, investors are now rushing into small caps because of recent returns. However, investors must realise that small caps are a highly volatile category. To build sustainable, good CAGR in small caps, you must commit to a long time horizon, ideally 8 to 10 years.
Our stock-picking philosophy follows a QGAR approach: quality, growth, and reasonable price. We view the market as a multi-factor, complex, evolving system, where standard textbook formulas often break down. For instance, despite rising US interest rates over the last five years, equity valuations expanded rather than contracted.
We optimize our portfolio by assessing business cycles, quality of management, and growth visibility over 12 to 24 months, while maintaining strong sectoral diversification to hedge the portfolio.
In efficient markets, sectors with high growth will rarely offer cheap valuations in a pure value sense. Instead of asking whether the current valuation is low, investors must determine whether the underlying growth will sustain over two, five, or seven years, as that sustainability dictates whether a stock re-rates or de-rates.
We are taking calculated growth risks across four key sectors where we expect long-term expansion.
First, the premium consumption sector, as India’s rising per capita income, coupled with a generational shift in spending habits among younger decision-makers, is driving strong demand for branded and premium goods. This benefits the entire ecosystem.
