Good time to raise equity allocation: UTI AMC CEO

The current risk-reward scenario in the equity market suggests that it may be a good time to raise equity allocation. The market has effectively de-rated over the past two years as earnings have grown. This favorable risk-reward ratio makes investing in equity through lump sums particularly appealing. Historically, forward outcomes have been more positive in this region, indicating a promising outlook despite the possibility that the market may not turn around immediately.

Despite a 20-odd-year high in US yields, Indian yields have not reached similar levels. While US yields are problematic, the difference in bond yields between the US and India is relatively narrow. Additionally, global investors have recognized that emerging market bonds have outperformed US bonds over the last one, three, and five years due to India's better fiscal management.

Another factor contributing to high US yields is the significant corporate demand for money in the AI sector, which has diverted investment capital away from other markets. The attractiveness of India's bond markets is diminished due to the narrow yield differential, but investors are aware of the structural problems in the US. Many are aware that if the US continues to be fiscally irresponsible, yields could climb even higher, while India and other emerging markets have managed their fiscal deficits more effectively.

The attractiveness of the US equity market is also drawing disproportionate capital out of other markets, including AI-linked markets like Taiwan and Korea. Diversified portfolios with a large-cap bias are currently appealing, as they offer better valuation compared to mid- or small-cap portfolios. Within this diversified portfolio, banking, financial services, and insurance (BFSI) present the most significant opportunity in India.

The capital market within BFSI may be slightly undervalued, and core banking and lending businesses are attractively priced. With credit growth running in the mid-to-high teens, the financial system is well-supported. UTI MF's equity strategies have encountered struggles, mainly due to issues in blended strategies. The fund house is working on re-establishing guardrails to ensure that their execution aligns with their investment process, focusing on portfolio positioning to maintain a centrist position while avoiding extreme deviations.

While UTI MF's preference for large caps has contributed to underperformance in recent years, as small- and mid-cap stocks have outperformed, this imbalance is expected to correct itself over time. The fund house has also refreshed its talent and coverage, recognizing that the listed universe has expanded significantly in recent years.

Despite being perceived as conservative, UTI MF's investing philosophy is rooted in process-driven approaches, emphasizing discipline and adherence to risk management processes.