Roshan Chutkey, fund manager at ICICI Prudential AMC overseeing schemes worth ₹48,450 crore, believes India has entered what he calls a "moderate-return environment" — the reasoning behind the newly launched ICICI Prudential Balanced Hybrid Fund, whose NFO is open for subscription July 14, investing 40-60% each in equity and debt.

In this interview with ET Markets, Chutkey explains why a balanced approach, not aggressive equity bets, suits the next 12-24 months. Edited excerpts:

You have said this is the right time for a Balanced Hybrid Fund. Why do you believe so? Does that also mean you are structurally less bullish on equities over the next 12-24 months than you were a year ago?
If you look at the macro backdrop, global growth is slowing and global trade remains under pressure. Major economies across the world continue to face their own structural challenges. While India has remained relatively resilient, it cannot remain completely insulated from global headwinds. The positive aspect is that India’s policymakers have been proactive in addressing these challenges. Besides, our corporate balance sheets are in good shape. Also, valuations for many large cap names are reasonable compared to their own fundamentals. Taken together, this suggests we are entering a moderate-return environment.

A few years back, I was relatively cautious because in a slowing global environment, consumption and private investment by themselves cannot drive growth. And now, while government spending has been fiscally prudent, with a sustained rupee depreciation policy of the last 18 months, exports can do the heavy lifting of supporting growth. On an incremental basis, policy has become more favourable.

Therefore, while I remain constructive on equities, a balanced approach is likely to be an optimal path for investors. This is because I do not expect an exceptionally strong bull market over the next couple of years.

The fund will invest 40-60% in equities. If the fund were to begin investing today, how would you approach the asset allocation?

Investors choosing this product have already made an important asset-allocation decision by opting for a balanced strategy. While we do have an internal allocation model, this product is designed to maintain meaningful exposure to both equity and debt. Investors should think of it as a solution where the broad asset allocation is already pre-decided in line with their risk appetite.

Doesn’t that also increase the chances of underperformance during a strong equity bull market?
If we witness a roaring bull market, then yes, a Balanced Hybrid Fund may underperform a pure equity fund. That is because a portion of the portfolio will always remain invested in debt. However, investors are also rewarded with significantly lower volatility and a smoother investment journey.

If someone is starting their investment journey today, would you recommend investing entirely in a Balanced Hybrid Fund or building a portfolio of diversified equity funds?
For a first-time investor, a Balanced Hybrid Fund can be a starting point since new investors haven’t experienced market corrections or bear markets. Beginning with a balanced strategy provides investors with a smoother entry into equity investing while cushioning the portfolio from sharp drawdowns. Such an approach shields investors from the full volatility of an aggressive equity portfolio from day one.

Why choose a Balanced Hybrid Fund instead of other hybrid categories?
Every category within the hybrid fund universe has a distinct investment objective and is designed to address a specific investment need. Aggressive Hybrid Funds prioritise growth over capital preservation, while Conservative Hybrid Funds place greater emphasis on preserving capital. Balanced Hybrid Funds seek to strike a balance between these two objectives, aiming to deliver long-term wealth creation while helping manage downside risks. In that sense, it is balanced in nature.

Balanced Advantage Funds have a more flexible mandate that allows fund managers to dynamically adjust asset allocation based on market conditions. This flexibility offers a different investment approach and is suited to a different investment mandate. In effect, each hybrid category has a clearly defined role within the investment landscape, reflecting the diverse needs and preferences of investors.

Which sectors currently offer the best combination of valuations and fundamentals?
We continue to find valuation comfort in large private sector banks, life insurance companies, select IT companies, chemicals and pharmaceuticals. These sectors currently offer a favourable balance between valuations and underlying business fundamentals.

IT stocks have corrected significantly, yet investor sentiment remains divided. At what point do valuations become attractive enough?
In the case of IT, valuations alone are not the key question. The bigger question is whether these businesses will continue to remain relevant over the next two to three years in an AI-driven world. The sector is clearly going through disruption, which naturally creates uncertainty and volatility.

Our view is moderately positive. Investors shouldn’t be excessively aggressive, but neither should they ignore the sector. The focus should be on identifying companies that can successfully adapt and remain relevant in the evolving technology landscape.

Would you describe IT as a contrarian opportunity today?
Yes, IT is certainly a contrarian opportunity today. If investors believe IT services companies will continue to play a critical role in enterprise AI adoption, system integration and take part in orchestration layer opportunities over the coming years, then maintaining a reasonable allocation makes sense.

Could initiatives by global technology companies such as Microsoft’s enterprise AI investments threaten Indian IT services?
Whenever an industry undergoes disruption, there will be noise. Alongside concerns, we are also seeing partnerships between global AI companies and Indian IT firms, which reinforce the relevance of the sector. Rather than reacting to every headline, investors should focus on the larger question: Will Indian IT companies remain relevant in the AI ecosystem? We believe they will.

Could the correction in South Korea and the unwinding of the AI trade redirect foreign flows towards India?
AI unwinding trade is among the several narratives which emerge frequently in markets. If foreign institutional investors increase allocations to India, our markets will certainly benefit. However, it is extremely difficult to build an investment strategy based purely on anticipated FII flows. We prefer to remain focused on long-term fundamentals rather than short-term market narratives.

What investment horizon would you recommend for someone investing in this fund for the first time?
Investors should ideally have a minimum investment horizon of three years. Five years would be even better. As investors gain experience and depending on market conditions, they can gradually diversify into other equity categories such as flexi-cap funds. However, for someone beginning their investment journey today, a Balanced Hybrid Fund provides an optimal starting point.

What are your valuation models indicating at present?
Our models continue to favour large-cap equities. Incrementally, equities appear more attractive than debt, while commodities such as gold and silver continue to play their role within diversified portfolios. Overall, we remain constructive on equities, but within the context of a moderate-return environment, having a disciplined asset allocation will be more important than aggressive positioning.