‘More retail investors are looking at index funds’: Swarup Mohanty, vice chairman and CEO, Mirae Asset Mutual Fund  

The West Asia crisis has lasted longer than expected. Has your cash component gone up or you are staying fully invested?

The war may end but its impact almost certainly will not. When the world’s largest economy shifts behaviour, every other economy follows. We are in the middle of that transition, and whoever internalises this early will come out ahead. We do not hold cash and that has never been our approach. We are a fully invested firm. Adversity changes cycles and some positions take a hit, but it also creates an opening. Some great businesses are now available at compelling prices and we are actively building portfolios around that opportunity. Beyond the conflict, we are positioning for India’s growth story and incorporating sectors that define the next leg of this growth in our portfolio. 

FPI outflows have persisted despite corrections in key indices. Do you see foreign flows returning anytime soon?

Global capital for nearly two years has gone almost entirely to AI and AI-adjacent businesses. The US and South Korea benefited directly. India was left out because global investors perceive us as under-exposed to AI and that perception drove allocation decisions. Additionally, there have been concerns about elevated valuations in 2024, followed by an earnings slowdown and highly attractive US sovereign yields. In a risk-off environment, capital flows to the dollar. Foreign flows will not return in any meaningful way until the rupee stabilises and valuations are genuinely attractive. India’s quality as an asset is unquestioned and the debate is purely about price. In select pockets it is beginning to look reasonable, but on a broad market basis investors are still weighing their options. 

Domestic mutual fund inflows have been strong, yet markets remain volatile. How long does this play out?

Given the scale of geopolitical and macro headwinds, the market correction has been remarkably contained due to the domestic inflows without which, the picture would be considerably worse.

Both foreign and domestic capital matter and the market cannot sustain itself on domestic liquidity alone. But what the SIP-driven inflows signal is a genuine structural shift in household savings behaviour, disciplined and recurring capital that does not exit on volatility.

If 60% of our incremental inflows by year-end are from investors under 30, then within three to four years that cohort will be larger than the entire current investor base. Their risk appetite, time horizon and market literacy are all different. This is not a trend that will subside, it will accelerate.

Passive investing still seems to be largely an institutional play. Are retail investors genuinely participating?

Passive schemes have grown from 6-7% to 19-20% of industry folios over the last five years. The incremental folio generation outpacing the active side on a percentage basis shows retail participation. Any apparent FY26 slowdown in index fund flows needs to be disaggregated between equity and debt. The outflows are mostly concentrated in target maturity funds than in equity passives. Our conviction is that ETFs will ultimately prevail. As markets deepen organically, concerns around impact cost and NAV premiums will fade which is already the case with broad-based indices. The natural progression is active to index fund to ETF, and the product innovation happening on the passive side is generating ideas that active categorisation cannot replicate.

Mid and small caps continue to see frothy valuations despite widespread concern. How do you see this playing out?

Every market cap band has good businesses and not so good ones, irrespective of size. Strong companies are available at attractive prices across the spectrum right now. 

The mid cap space is structurally sandwiched between large cap and the broader market which drives divergent views, and reasonably so. The IPO pipeline has broadened the market with new listings in sectors like textiles, hospitals, AMCs, capital markets infrastructure and new-age tech predominantly in the mid and small cap space which will define India’s next growth phase. The Nifty 500 is today a far more accurate representation of Indian markets than the Nifty 50. Some pockets will always stay frothy but the breadth of opportunity now available across sectors and themes is far greater than five years ago.

Which sectors and themes are you most constructive on? 

Banking and financial services is a permanent portfolio anchor with still significant embedded value to be unlocked. Healthcare and discretionary consumption segments will benefit as India’s per capita income moves from $2,500 to $3,500. Over the long term, we also see energy transition and India’s graduation from IT to AI as major themes.