Risk shifted to investors, warns ICICI Prudential AMC's CIO Sankaran Naren

India’s capital markets have entered a new phase, in which the burden of risk lies squarely on investors, rather than banks or financial institutions, according to ICICI Prudential Asset Management Company’s Chief Investment Officer, Sankaran Naren. Speaking at the Morningstar Investment Conference India 2025 in Mumbai, Naren cautioned that the current market environment demands far greater discipline from retail investors, who today form a significant portion of market inflows.

Naren explained that in earlier decades, capital formation in India was largely supported by development financial institutions such as IDBI, IFCI and ICICI. These entities provided long-term industrial financing and absorbed the inherent risks of funding new projects. This was followed by a phase where banks took on investment risk, particularly in the years leading up to 2007–08. However, that structure has now changed.

“The bigger challenge for the entire investor community is that every risk is taken by the investment community,” Naren said. “Banks are not lending for anything risky. There are no development financial institutions anymore. The risk taking for the entire country today lies with the investors.”

He noted that mutual funds and portfolio managers have introduced increasingly specialized investment vehicles, small-cap, mid-cap, flexi-cap and thematic funds to meet rising investor demand. But with strong flows coming into specific segments, fund managers have no choice but to deploy capital even at elevated valuations. “If SIPs come in costly midcaps, the midcap fund manager will invest in costly midcap issues,” he pointed out, emphasizing that valuation risk has effectively shifted to investors themselves.

Another concern, Naren said, is the mismatch between the investment horizons investors claim to have and their actual behavior during market corrections. “Everyone says they are investing for 20 years, but very few stay for even 10,” he remarked. This lack of patience and discipline, he warned, will likely result in disappointment during market cycles. He also highlighted an often-overlooked trend: sustained selling by private equity investors and multinational corporation promoters.

These groups, with deep understanding of market cycles and valuation dynamics, are using the current high valuations as an opportunity to exit. At the same time, retail investors buoyed by optimism and steady SIP flows continue to buy.

“Knowledgeable sellers are exiting at expensive valuations while new investors are entering,” he noted.

Importantly, Naren stressed that this is not a comment on India’s economic fundamentals, which he described as stable and supportive of long-term growth. Rather, it is about investor behavior and portfolio construction. “There is nothing wrong with the fundamentals or the macro environment. The problem is that investors are focusing only on equity,” he said.

To navigate this phase prudently, Naren strongly advised diversification. He recommended that investors include fixed income instruments and balanced advantage funds in their allocations, instead of concentrating solely on equities. “Do not put everything into one asset class. Asset allocation is the only way to stay safe,” he concluded.