Anthony Heredia, managing director and chief executive officer of Mahindra Manulife Mutual Fund , expects equity market returns to be 2-3% higher than nominal GDP growth going forward. Speaking on market outlook and investment strategy, he noted that India's relative valuations are beginning to turn attractive in dollar terms after underperforming global peers for a year amid high valuations and low earnings growth.

Q3FY26 Earnings Assessment

Regarding the Q3FY26 (October-December) earnings early-bird numbers, Heredia observed that while revenue is up, net profit growth has lagged. He attributed this differential to one-time effects of provisions to comply with new labour laws, explaining that most earnings reported so far have been from larger companies and no significant negative surprises are expected from remaining results.

Portfolio Strategy and Sector Focus

The fund manager maintains a large-cap biased portfolio stance, driven primarily by valuation considerations. His current sector preferences include:

• Financials
• Consumption
• Information technology (IT)
• Commodities
• Manufacturing export-oriented businesses (subject to free trade agreement outcomes with the European Union and the US)

Given that sector rotation is playing out over shorter time cycles, Heredia emphasized that their core approach continues to be bottom-up stock selection.

Investment Allocation Recommendations

Heredia advocates for multi-asset products to be at the core of future incremental allocation, particularly over the next couple of quarters, citing recency bias that investors have toward gold and silver.

Fund Performance and Market Outlook

All equity funds under management, including mid and small-cap funds, have performed well over the past year. The multi-asset allocation fund has also delivered strong results. Heredia expects flows to moderate for fresh offerings, noting that extensive IPO supply is weighing on secondary markets amid global headwinds.

For mutual fund flows, he anticipates preference toward multi-asset and flexi/multi-cap diversified funds, while not expecting significant changes given large SIP anchor flows.

Policy Expectations and Foreign Investment

While declining to comment on specific budget measures, Heredia suggested that policy measures aimed at boosting foreign capital flows could help create economic momentum. He believes significant groundwork has been done to boost manufacturing, infrastructure capex, and consumption, with results expected to play out in the medium term.

Regarding foreign investor sentiment, he noted that recent geopolitical events and volatility in bond and currency markets have made investors more deliberate about committing future capital. However, he maintains that the core premise of the Indian economy offering a wide consumer base with positive demography, reform agenda, and world-class infrastructure remains intact.

Technology and AI Investment Perspective

On artificial intelligence investments, Heredia observed similarities between AI evolution and internet adoption from the early 2000s, expecting AI to follow a similar but accelerated timeline. He noted that while significant developments are occurring, not everything is being publicly disclosed. The challenge lies in AI providers competing to create future capacities while monetization remains uncertain, making it difficult to identify eventual winners.

Harsha Upadhyaya, Chief Investment Officer at Kotak Mahindra Asset Management Company, has issued a cautionary advisory to investors regarding small-cap investments, citing significantly stretched valuations and disappointing earnings performance. The fund house, which manages assets worth nearly $6 billion, is recommending a strategic shift towards large and mid-cap stocks in the current market environment.

Small-Cap Valuations Remain Stretched

Upadhyaya highlighted that small-cap valuations are currently trading at levels 40-45% above their long-term averages, presenting substantial risk to investors. The concerning aspect extends beyond valuations, as small-cap earnings have consistently disappointed and even declined in some recent quarters, falling well short of growth expectations.

In contrast, large-cap valuations have moved closer to historical norms following a period of consolidation, making them more attractive for investment. Upadhyaya recommends that investors align their portfolios towards large and mid-caps based on their individual risk appetite, suggesting that a typical 5-10% allocation to small-caps within diversified funds remains adequate in the current market environment.

Market Volatility Expected to Continue

The market volatility witnessed in the previous year has carried forward into 2026, according to Upadhyaya's assessment. While the ongoing earnings season is expected to demonstrate decent recovery and provide support at lower levels, negative international news flow continues to act as a headwind for markets.

With broader market valuations hovering around long-term averages and earnings recovery still in its early stages, sharp market movements are likely to persist. This environment reinforces the need for careful stock selection and appropriate market cap allocation strategies.

Real Estate Sector Positioning

Kotak AMC has maintained an underweight position on the real estate sector for an extended period, a strategy that has proven beneficial given the sector's recent weak performance. Upadhyaya noted that Indian real estate is likely in the sixth year of an upcycle that typically spans eight to ten years, suggesting the sector is past the halfway mark of its current cycle.

While recent corrections could present selective buying opportunities, the fund manager emphasized caution and indicated the firm would avoid broad-based sectoral investments, remaining selective only if corrections deepen further.

Budget Expectations and Policy Outlook

Looking ahead to the Union Budget, Upadhyaya does not anticipate any major shifts in policy direction. The government's continued emphasis on fiscal prudence is expected to result in early double-digit growth in capital expenditure, with spending flows directed towards defense, renewables, and manufacturing sectors.

The policy framework is likely to maintain its current trajectory, with consumption continuing to benefit structurally from the goods and services tax (GST) system. This continuity in approach suggests sustained support for key infrastructure and manufacturing initiatives.

Precious Metals and Investment Strategy

Upadhyaya expressed a positive long-term outlook on precious metals such as gold and silver, supported by global trade tensions, geopolitical factors, and changing world order dynamics. However, he cautioned against chasing prices following their recent sharp increases, noting that assets moving in a vertical fashion typically experience subsequent volatility.

The recommended approach involves staggered investments with a long-term investment horizon to avoid fear-driven buying decisions. This strategy allows investors to benefit from potential opportunities while managing the inherent volatility in precious metals markets.