In conversation with Radhavi Deshpande, CIO, Kotak Mahindra Life Insurance Company Ltd

How do you view current equity market valuations? Do they fairly reflect India Inc’s performance for FY25? Additionally, what’s your outlook for Q1FY26 earnings?

Current equity valuations are in line with the long-term average. FY25 earnings growth was muted as the economy slowed down in the 1st half due to global uncertainty and tighter monetary and fiscal conditions locally. However, both the RBI and the government have taken a number of measures to ease liquidity conditions and boost capital expenditure from January. With this, we are observing improvement in some fast-moving indicators like GST collections and fuel consumption. With a normal monsoon and as the effect of monetary easing and fiscal spending feeds into the economy, we believe that economic momentum will improve further in the second half and earnings are likely to grow in the low double digits in FY26.

What are the top 2-3 themes you believe will dominate the investment strategy for life insurers over the next 3 years?

Consumption has been growing slowly for the last few quarters and the government has enacted a number of measures like income tax cuts and interest rate cuts to give a boost to the same. Rural consumption is likely to improve due to the direct transfer of funds to a select population by the state government and a normal monsoon. Consumer stocks have underperformed the market in the last few years and hence their valuations are reasonable compared to the market. Hence, we expect consumer stocks like retail, durable and auto to do well over the medium term. In investment, India will need a lot of investment in power if it wants to grow at 7 per cent in the medium term. This will be beneficial for the entire value chain from capital equipment supplier, utilities and finance companies. Overall, the mix is likely to improve in favour of renewable energy and hence capital equipment companies in solar, wind and hydro will benefit more.

Could you share your core investment philosophy and how recent IRDAI regulatory changes are shaping your current investment decisions?

Our core investment philosophy focuses on generating stable, risk-adjusted returns while adhering to the highest standards of regulatory compliance. This goal is achieved through a diversified investment strategy. The strategy combines a mix of government securities, corporate bonds, equities, and other permissible asset classes as outlined by the IRDAI. Significant emphasis is placed on rigorous fundamental analysis and in-depth market research keeping in sight our long-term investment horizon.
Recent IRDAI regulatory changes, particularly those relating to Bond Forwards and Equity Derivatives, are significantly shaping current investment decisions. These changes have given the insurance industry new risk management enablers to protect policyholder returns. These regulatory changes are viewed as positive steps toward strengthening the insurance sector and promoting greater policyholder protection. The commitment is to adapt investment strategies and processes to fully comply with these changes and continue delivering value to policyholders.

What is your outlook on fixed income versus equity allocations in the coming quarters?

In the near term, we believe fixed income returns will remain relatively more stable and predictable given the stable macroeconomic backdrop and low inflation. A steep yield curve will also protect the investor returns in the face of a long pause in policy rates. The medium to long-term potential of the Indian equity market remains promising, though near-term gains may be limited. This cautious near-term outlook is based on global policy uncertainties and rich valuations. We remain constructive on equities as an asset class over the medium term. Asset allocation to both fixed income and equities has a space in our long-term portfolio strategy, which emphasizes a balanced and diversified approach. Our asset allocation decisions will continue to be guided by long-term strategic objectives while using tactical adjustments to capitalize on emerging opportunities.
 

Is there a growing appetite for alternative asset classes such as REITs, InvITs, or private equity within your portfolio?

Alternative investments offer a welcome portfolio diversification beyond traditional assets. They can also potentially deliver higher risk-adjusted returns over time, which aligns with the long-term investment goals of insurance companies. REITs and InvITs provide exposure to income-generating real estate and infrastructure without direct ownership and management responsibilities. This is appealing for insurers seeking exposure to sectors benefiting from India's economic growth and infrastructure development. The insurance industry has limited presence in the private equity space. On the other hand, REITs and InvITs have seen more active participation with the evolving regulatory landscape. However, opportunities in these new-age assets remain limited in market size and number of instruments. These investments require a meticulous due diligence process and a clear understanding of the risks involved. Hence, we remain selective in the choice of our investments and continue to evaluate every new opportunity on its merits.