Riding Volatility with Discipline: Inside SBI MF’s Contra & Balanced Advantage Funds

Summary

In this insightful conversation, DH Balachandran, the head of equities at SBI Mutual Fund, discusses the firm's investment philosophy and strategy for building equity portfolios. He shares perspectives on the market's volatility, recent rebounds, and key factors like interest rates and valuation that influence their decisions. Balachandran elaborates on their cautious approach during uncertain periods, such as 2025, and how they manage portfolios, including the contra fund. He also highlights moderate return expectations for the near future due to economic growth moderation and high valuations, offering valuable insights for investors planning for the coming months.

Takeaways

• 😀 The investment philosophy at SBI Mutual Fund is built on three pillars: business model, management competency, and valuation.
• 😀 A robust business model and strong management are crucial for ensuring the long-term success of companies in the fund's portfolio.
• 😀 Valuation is key: the fund seeks companies that are priced reasonably, even if they possess strong growth potential and good management.
• 😀 Real-world investing requires compromises, as the 'holy trinity' of good business, management, and valuation can be hard to find simultaneously.
• 😀 The equity markets experienced a surprising and rapid rebound since March 2025, largely driven by a decline in interest rates.
• 😀 Lower interest rates reduce the cost of capital, which in turn supports higher equity valuations, leading to a rebound in stock prices.
• 😀 SBI Mutual Fund’s portfolios typically do not make drastic changes in response to short-term market events, maintaining a medium-term outlook.
• 😀 Despite recent market fluctuations, the fund has maintained a cautious stance, with cash reserves being preserved in some funds, like the Contra Fund.
• 😀 In early 2025, more opportunities emerged for investment as market conditions improved, but some cash reserves still remain in the Contra Fund, awaiting better prospects.
• 😀 The Balanced Advantage Fund increased its equity allocation from 20% to 60% in early 2025, driven by improved market conditions and lower interest rates.
• 😀 Moderate return expectations are likely for the upcoming financial year, as India’s economic growth is expected to remain steady but not as robust as earlier expectations, limiting corporate earnings growth.

Q & A

What are the three key pillars that DH Balachandran uses to evaluate companies for equity investment?

DH Balachandran focuses on three pillars when evaluating companies: 1) The business model, assessing the robustness and growth potential of the company. 2) Management competency, evaluating how well the company is managed. 3) Valuation, ensuring the company is purchased at a reasonable price.

How does DH Balachandran describe the current equity market rebound since March 2025?

DH Balachandran is surprised by the strong rebound in equity markets since March 2025. He attributes this to a significant reduction in interest rates, which has supported equity valuations and led to a sharp recovery in the market.

What were the two main concerns DH Balachandran had regarding the equity market in 2024?

The two main concerns were: 1) A slowdown in growth rates, especially after the strong recovery post-COVID. 2) Elevated valuations, which were significantly higher than historical averages, raising concerns about the sustainability of market growth.

How does DH Balachandran approach portfolio construction when there is a lack of attractive opportunities in the market?

When there are limited attractive opportunities, DH Balachandran focuses on preserving 'dry powder'—keeping a higher cash percentage in the portfolio rather than being forced into making investments in overvalued sectors.

What role do interest rates play in DH Balachandran's investment strategy?

Interest rates play a crucial role in DH Balachandran’s strategy because lower interest rates reduce the cost of capital, which in turn supports higher equity valuations. A reduction in interest rates can therefore be a significant factor in driving market rebounds.

How does DH Balachandran view the performance of SBI Mutual Fund’s portfolios in the context of recent market conditions?

DH Balachandran mentions that despite the volatility, the portfolios at SBI Mutual Fund are structured with a medium-term objective, meaning they do not react drastically to short-term market changes. However, he notes that the recent drop in interest rates is beneficial for certain sectors.

What is DH Balachandran’s perspective on the role of 'contra funds' in the current market?

DH Balachandran highlights that in contra funds, there were fewer attractive opportunities last year, which led to an increase in cash reserves. However, as opportunities emerged in specific sectors, cash reserves were gradually deployed. Despite market rebounds, they continue to hold some cash in anticipation of better opportunities.

How has the allocation in the Balanced Advantage Fund changed over time?

The equity allocation in the Balanced Advantage Fund has increased significantly, from 20% in the middle of last year (due to high valuations and slowing growth) to 60% in early 2025. This shift was driven by falling interest rates, which made equities more attractive.

What factors does DH Balachandran believe will influence return expectations for the next financial year?

DH Balachandran suggests moderate return expectations for the next financial year due to a combination of factors: high valuations, slower-than-expected economic growth, and the corporate earnings growth rate not being as robust as previously anticipated.

What is DH Balachandran's outlook for India’s economic growth and corporate earnings?

DH Balachandran believes that while India's macroeconomic fundamentals remain strong, the country’s GDP growth is expected to hover around 6.5%, rather than the anticipated 8%. Corporate earnings growth is also expected to be moderate, leading to more cautious return expectations.