In an era of elevated valuations and “well-discovered” stocks, ICICI Prudential Mutual Fund CIO S Naren says the art of equity investing has tilted decisively toward risk management — even if that means banking smaller, surer gains.
Naren said: “If we are more certain of a 10% upside, we may buy a stock with a 10% upside also. Because of the quantum of money we manage…” He explained his stance urging to look at the past year’s return for the benchmark indices.
“Contrary to what people think, go and look at the returns in the last one year,” he said. The Nifty 50 over the past one year ending August 11, has been flat with less than 1% return, which underscores how the market is re-aligning, delivering significantly lower returns compared to the first three years after Covid.
Naren describes this as relative value investing, shaped by high market levels where “to believe that you’re going to get big returns” is unrealistic. “What we fear all the time when we are managing public money is we hope we don’t cause big losses,” he said. “That is the reason we keep talking of asset allocation all the time.”
When asked about his approach to downside, while thinking of modest gains, Naren made a strong case for investing in large-caps. He said: “We would not want to buy a stock with a 20% downside and a 20% upside, ideally. We would like to buy a stock with a slightly lower downside and a higher upside. And so that is the reason why we end up buying large caps.”
Large-caps also offer stability in markets. At the same time, volatility, Naren said, is a friend. “Our entire framework itself is buy as the market goes down and sell as the market goes up… If there is a stock which sees a downside and we like the stock, that gives us an opportunity to actually accumulate more.”
Looking back, Naren said the focus has changed markedly over the cycle. “If you go back to a year like 2020, the art of equity fund management was look for upsides. From there, today, it has become an art of risk management. Because we have to think, What is the downside? What can go wrong?”
On portfolio construction, Naren said he holds a core weightage in certain stocks and adds an “auxiliary weightage” based on factors like price, technicals or trading ranges.
He cautioned investors against mistaking recent performance for low risk. “From 2012, January till today, we have not had any big down year — doesn’t mean it is a zero-risk asset class… Equity has become so much a part of Indian life after COVID that people have to understand they are not trading an asset class like fixed deposit or debt mutual funds.”
Despite muted market returns in the past year, Naren said asset-allocation-oriented funds have often outperformed pure equity products. “Our entire thought process is try to make moderate money… and that has resulted in a decent experience.”
Watch S Naren's exclusive interview here:
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