Kailash Kulkarni, CEO at HSBC Mutual Fund India talks to Nesil Staney about the investment landscape for the next two decades, sector picks, fund flows through SIPs, flows from smaller Indian towns and strategies to cushion volatility.
1.How do international investors look at India’s mutual funds industry?
India is widely seen as one of the strongest structural growth stories in the global investment landscape. International investors also value India’s regulatory framework, product innovation, and the scale of opportunities in underpenetrated regions. While valuations are often seen as relatively high, global investors recognize that they are supported by fundamentals and consistent domestic flows. As a result, India is expected to remain a key allocation in global portfolios, attracting both passive and active strategies from overseas investors. We have seen significant inflows into our India dedicated funds from global investors who are excited to be part of the structural growth story that they can see in India.
2. What transformation changes can we expect to see over the next two decades?
Consumption, Financialization and Infrastructure: As Indian households keep growing their disposable income, there will be aspirational buying with many of the basic requirements being met already. We are positive on consumer discretionary sectors as the penetration level is very low and there is a large unorganized/ regional/ unbranded market which is gradually shifting to the organized/ branded space. We believe that there is a great opportunity to take advantage of the potential growth in these sectors in the short as well as long-term.
3. What factors are driving the surge in retail participation and inflows from smaller towns?
The retail growth story remains one of the strongest anchors for the mutual fund industry. Retail participation in mutual funds has remained steadfast of almost 28% of the AUM In FY2025. This is driven by the confidence of retail investors in mutual funds as a long-term wealth creation avenue driven by digital adoption. Smaller towns are emerging as strong contributors: as of June 2025, ~27% of individual investor assets came from B-30 cities. Fintech apps, simplified onboarding and investor education have boosted confidence, while vernacular language communication and regional outreach have deepened reach in Tier-2 and Tier-3 towns. Together, these trends have helped the mutual fund industry expand to an AUM of Rs 75.19 lakh crore as of Aug 2025.
4. What are the themes to buy towards Viksit Bharat?
For Infrastructure, we believe Power, Industrialization and Defence will be long-term themes towards building a Viksit Bharat. Power demand is ever-growing with peak deficits increasing and newer demand sources such as EVs, AI, data centers, etc. increasingly becoming important. Industrialization will keep gaining traction with government push towards making India a global manufacturing hub. We have already seen considerable success in smartphones in this context. As geopolitical situation becomes volatile and we move from a bipolar towards a multipolar world, Defence spending is likely to gain share in the overall budget. Investments are also likely in transport infrastructure like Roads, Railways, Ports and Airports to drive overall growth in capex investments.
5. How is the MF industry managing risk amid volatility while maintaining robust equity and debt inflows?
The industry is monitoring and containing volatility with robust, regulator-driven risk tools while keeping inflows steady via disciplined retail behaviour. There are several key mechanisms for risk management which are utilized by the industry and include stress testing for mid- and small-cap schemes, board-approved liquidity risk policies, etc. These measures, alongside tighter risk governance under Sebi’s Risk Management Framework, have improved transparency around liquidity and market impact risks.
6. How are the consistent SIP flows holding the markets?
On the flows side, steady SIP contributions and continued inflows, even during choppy months, signal investor stickiness and long-term orientation. In my view, investors have gained good understanding of the markets and panic has reduced even in case of major outflows from FIIs. Fixed income funds have reduced volatility on the back of exposure in high credit quality papers & higher liquidity while also managing yields. Similarly, Hybrid Funds also cushion volatility by offering calibrated equity exposure, liquidity, and diversified risk premia. This has helped sustain net additions across categories despite market swings. Simply put, robust risk infrastructure (stress tests, swing pricing, liquidity buffers) plus SIP-led participation and diversified product design enable funds to manage drawdowns and liquidity while maintaining healthy, recurring inflows into both equity and debt schemes. SIP flows are a major contributor, with Rs 28,265 crore collected in August 2025 alone and total annual SIP inflows crossing Rs 2.9 lakh crore.
7. What is you view on passive and active funds? Who should opt for it?
Both active and passive funds are essential, and the choice depends on investor objectives. Passive funds are best suited for those who want low-cost, transparent and market-linked returns without the uncertainty of manager-driven decisions. They are ideal for building a stable core portfolio for the long term. However, active funds are preferred for navigating market volatility and tapping into specific themes or sectors where stock selection can generate alpha. A balanced approach works best, where investors use passive funds for core stability and compliment them with active funds to generate potential higher returns.
8. How do you balance liquidity needs with investment opportunities in your MF schemes?
Ans: Currently, as a fund house, we don’t face capacity constraints in any of our MF schemes. In terms of liquidity, we find suitable opportunities for investments across our schemes. The depth and the breadth of the market has significantly increased over the past few years driven by regulatory reforms in capital markets, higher public issuances and record participation from domestic investors. This offers exciting opportunities for investors across new niche sector and companies many of which are in the mid and small cap space. While valuations for some of these companies may appear excessive in the short-term, these are great businesses to own from a medium to long-term perspective.
To evaluate the liquidity aspect, our risk team also undertakes stress test on liquidity for all our schemes. SEBI regulations have also mandated stress test on liquidity for Mid cap and Small cap funds.
At HSBC Mutual Fund, we don’t take cash calls and average cash levels across our schemes range from 1-5%. Irrespective of market cycles, we believe there are always good investment opportunities to make money for investors.
9. What differentiates the stock selection criteria of your fund managers?
Within our fund, one aspect which we encourage is to think ‘independently’ and not following the herd mentality. ‘Independence’ can be depicted in various form from fund management perspective. To state a couple, our fund managers think independent of the benchmark resulting in high active share for most funds. We take high conviction bets to drive alpha.
While overall risk management framework applies uniformly to all fund managers, within this framework there is independence to choose individual styles.
Fund managers use both top down and bottom-up analysis for identifying opportunities. Top-down analysis involves analysing government focus and vision, total addressable market, number of players etc. Fund managers look at these dynamics across various sectors to assess the attractiveness of the sector and the sub-sectors which might have stronger tailwinds compared to others.
Post this evaluation, managers look at companies within these attractive sectors analyzing their past cycles, order book growth, book to bill ratio, profitability, likely upgrade in earnings, management levers for growth, market share gains and supplement this through channel checks with customers/ suppliers, etc. They also look at corporate governance practices within the company and whether there are any red flags in terms of accounting, cash flows, working capital, capex, leverage, etc. which warrant attention. Finally, they tend to look at valuations – absolute, historical and relative to peers to identify possible investment opportunities and deliver strong returns.
10. How are regulatory and structural reforms influencing the way you build and manage your investment strategy?
India has seen transformational reforms over the past decade or so which has seen the country becoming one of the fastest growing economies in the world. These reforms have been pivotal to the way we manage our investment strategy. We see these reforms providing stock/ sector tailwinds which accelerate growth or provide better return ratios for these sectors/ stocks. More importantly, these reforms provide a standard framework and a level-playing field for all operating companies.
To give an example, on economic reforms, a decade ago, Real Estate sector was reeling under stress with number of incomplete projects, overleveraged developer balance sheets, money used by developers across projects and loss of trust from consumers. Real Estate Regulatory Authority (RERA) brought the much-needed change with real estate sector being one of the best performing sectors from 2020-2024. Other reforms such as GST (vs Excise and VAT), Insolvency and Bankruptcy Code, Make in India, PLI schemes, etc. have benefited Building Materials, Consumer Durables, Banking and NBFCs, Organized Retailers, etc.
Also, focus on digital transformation and structural initiatives such as Jan Dhan, Adhaar, UPI, Digital KYC, account aggregator and ease of doing business have helped to formalize the lending and investing landscape of India driving financialization. This helped prevent leakages, improved credit penetration, provide credit at lower cost to borrowers and helped improve overall transparency. Some of these reforms tailwinds have been helpful in identifying sectors where earnings growth has been faster than historical trends and market expectations providing superior returns for investors in the long term.
11. From a long-term perspective, how should investors look at mutual funds?
Mutual funds should be seen as the cornerstone of household wealth creation in India. SIPs in particular, encourage consistent investing and help investors benefit from compounding and rupee cost averaging, regardless of market cycles. They provide disciplined, diversified and professionally managed access to markets, making them suitable for investors across income groups.
As India’s economy grows and savings shift from physical to financial assets, mutual funds will increasingly serve as a vehicle for retirement planning, education goals and long-term wealth creation. Investors should look at them not as short-term trading products, but as reliable long-term companions aligned with financial goals.
12. On what basis should a new investor select an MF SIP?
A well-chosen mutual fund SIP can help investors ride India’s growth wave while balancing market risks. For new investors, picking the right SIP begins with clarity on financial goals, time horizon and risk tolerance. For long term wealth creation, a combination of large, mid and small cap funds would be most suitable and can be part of the core portfolio. Ultimately, diversification and alignment with defined investment objectives are the pillars of wise SIP selection.
13. Is the SEBI proposal on small ticket SIPs viable?
Yes, SEBI’s proposal to allow SIPs starting as low as Rs 250 per month (Choti SIP) is a progressive step to enhance financial inclusion. It lowers entry barriers for first time investors, particularly from modest income groups. With growing access to digital payments, such small-ticket SIPs make investing seamless and affordable for a wider population that would previously have been excluded.
14. How are current valuations in equity markets? What is your directional call on the markets at this level?
We believe in a growth economy like India, market valuations can’t be seen on absolute basis alone and should be looked at more dynamically. While absolute valuations of 20x may appear at premium to historical averages, however, relative to teens growth expectations over the coming years, Nifty valuations appear reasonable. Domestic economy continues to remain strong driven by government measures such as income tax cuts, lower inflation, rate cuts by RBI along with regulatory easing, healthy system liquidity, strong government capex, etc.
We believe growth cycle in India may be bottoming out. Interest rate and liquidity cycle, decline in crude prices and normal monsoon are all supportive of a pick-up in growth going forward. Although, global trade related uncertainty remains a headwind to private capex in the near term, we expect India’s investment cycle to be on a medium-term uptrend supported by government investment in infrastructure and manufacturing, pickup in private investments and a recovery in real estate cycle. We expect higher private investments in renewable energy and related supply chain, localization of higher-end technology components, and India becoming a more meaningful part of global supply chains to support faster growth. Nifty valuations are modestly above 10-year average.
We believe equity markets in the very near term may remain range-bound until the geopolitical situation improves or turns favourably for India. Nevertheless, over the medium to long-term, we remain extremely positive on the India story and any weakness, if any, may be used to further build good positions.
With GDP growth amongst the highest in large economies, strong corporate earnings and a young demographic profile, international investors view India as a long-term opportunity rather than a cyclical bet. The mutual fund industry’s expansion to an AUM of over Rs 75 lakh crore, coupled with rising SIP flows, demonstrates robust domestic participation, which strengthens market resilience.