The Indian stock market has been witnessing a surge in high-profile IPOs and strong investor participation, but S Naren, CIO of ICICI Prudential AMC, has cautioned that the current environment carries significant risks. Speaking in a podcast with Moneycontrol, Naren highlighted that many companies today are trading at price-to-earnings multiples of 40 to 60, with some even lacking meaningful growth. In some cases, he noted, investors are effectively paying the equivalent of 25 years’ worth of earnings for businesses that are not generating strong cash flows.

According to Naren, while inflows of money into the market can drive valuations higher for a couple of years, over the long term it is the fundamentals that matter more than liquidity. He also pointed out a shift in capital allocation, with retail investors rather than banks becoming the primary providers of capital through IPOs, Qualified Institutional Placements, and private equity investments. This has created a risk of overvaluation, particularly in loss-making companies.

Drawing parallels to the IPO boom and bust of the 1990s, Naren recalled that the same issues of inflated valuations, deteriorating portfolio quality, and excessive focus on small-cap and unlisted stocks were prevalent back then. He warned that investors must avoid repeating those mistakes.

A central theme in his message was the need for asset allocation. While equities have become a part of daily financial life in India, especially after the Covid pandemic, Naren stressed that they should not be seen as a low-risk investment. He recommended that investors spread their portfolios across other asset classes, including debt instruments, gold, and real estate investment trusts, to reduce overall risk and improve portfolio stability.

He further advised that in the current market scenario, where valuations are stretched, chasing exceptionally high returns often comes with a much higher risk factor. Instead, he suggested focusing on stable large-cap companies and aiming for moderate, sustainable returns of around 10 to 20 percent, which carry lower risk.

Naren also emphasised that long-term investment opportunities still exist in India, noting that while most global markets have underperformed over the past 17 years, India and the United States have been exceptions. He believes that India could still witness a multi-year upward trend if investors approach the market with discipline and a diversified strategy.

His final message was clear: equity investing is not like putting money in fixed deposits or debt mutual funds, which carry lower volatility and risk. Equities can deliver strong rewards but also have the potential for significant losses, and understanding this difference is essential for building a healthy financial portfolio.

 

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