In conversation with Sandeep Bagla, CEO, TRUST Mutual Fund

Following recent interest-rate hikes by central banks, how do you think they could influence equity markets?

Inflation has remained above the comfort level of central banks in both the United States and India. Rising bond yields also suggest that market participants expect inflation to remain persistent. High commodity prices, tariffs, supply-side pressures and excess liquidity are all feeding into inflation expectations. Against this backdrop, central banks have begun raising interest rates, and I expect them to remain vigilant and move towards a tighter monetary policy stance if inflationary pressures persist. The RBI’s decision was driven primarily by India’s domestic inflation, growth and liquidity conditions, rather than by the U.S. Federal Reserve’s decision alone.

Higher interest rates raise the cost of capital and can moderate both consumption and investment demand. They can also compress valuation multiples, particularly for highly valued and rate-sensitive businesses. As a result, broad equity indices could remain range-bound for some time. However, even in such markets, companies delivering sustainable earnings growth can continue to create value. Stock selection and earnings visibility will therefore become more important than simply taking a broad market view.

As the mutual fund industry moves from rapid AUM expansion to the next phase of maturity, what should ultimately matter more to the industry, the amount of money it manages, the quality of returns it delivers, or the financial outcomes it creates for investors?

The ultimate purpose of the mutual fund industry is to help investors move closer to their financial goals in a disciplined manner. AUM growth is important because it indicates wider participation, but AUM by itself cannot be the only measure of success. Equally important are the quality and consistency of investor outcomes, suitability of products, appropriate asset allocation and the ability of investors to remain invested through market cycles. The industry has invested significantly in educating investors about financial markets, the fundamentals of investing and the benefits of disciplined asset allocation.

The priorities for the next phase should be balanced and sustainable growth in AUM, broader retail participation, lower volatility in the investor experience and better alignment between products and financial goals. In the long run, good investor outcomes will be the strongest foundation for durable industry growth.

Inflows into Mid-Cap and Small-Cap funds have remained relatively steady in recent months compared with Large-Cap funds. Do you think investors are increasingly chasing recent performance, and what risks could this create?

Small and mid-cap companies have grown significantly in sales, profits and market capitalisation over the past five years. The largest companies in these categories are sizeable businesses by any conventional measure, and earnings growth in several small and mid-cap companies has also been relatively strong. This explains part of the sustained investor interest. At the same time, recent performance can influence investor behaviour. Strong equity-market returns over the past five years, along with the removal of the earlier tax advantage available to debt mutual funds, have contributed to a systemic increase in allocations to equities.

Within equities, the recent preference has shifted increasingly towards mid-cap and small-cap funds. The key risk is that investors may extrapolate recent returns without fully appreciating the higher volatility and liquidity risks in these segments. A prolonged period of underperformance could lead to disappointment and redemptions precisely when long-term investors should be maintaining or gradually increasing equity exposure. Investors should therefore allocate to these categories in line with their risk appetite, investment horizon and overall asset-allocation plan, rather than on the basis of recent returns alone.

Artificial intelligence and data analytics are increasingly being used across investment research and portfolio management. How is your AMC using technology without compromising human judgement?

AI is proving to be a valuable tool for summarising company information, processing large datasets and supporting basic financial and equity analysis. At TRUST Mutual Fund, our fund managers and analysts use AI-enabled tools to examine data across companies, sectors and time periods more efficiently. This allows the investment team to spend more time on interpretation, debate and decision-making. However, technology is an aid to judgement, not a substitute for it.

Investment decisions require context, experience, an understanding of management quality, an assessment of competitive dynamics and the wisdom to distinguish a temporary trend from a structural change. There is no replacement for the experience and judgement of fund managers. Used responsibly, AI is a strong efficiency enhancer that can improve the breadth and speed of research while keeping accountability and final decision-making firmly with the investment team.

Do you think investors in smaller cities require a different product mix, distribution model or investor-education approach compared with T30 investors? What initiatives is your AMC undertaking to address the evolving needs of investors in these markets?

Equities and mutual funds are becoming increasingly popular in B30 cities, and we are seeing broader participation from smaller towns. Technology has helped bridge information gaps and has made the investment process easier and more accessible. At the same time, human guidance remains important, especially for first-time investors who need help understanding risk, volatility, asset allocation and the benefits of staying invested for the long-term.

The core investment principles do not change between T30 and B30 markets, but the engagement model should be adapted to local needs. Communication should be simple, relevant and available in local languages. Products should be explained in the context of financial goals rather than recent performance. Distributors remain important partners because they can combine local trust with ongoing investor guidance, while digital platforms can make transactions and servicing more efficient.

We are also seeing growing participation from women and younger investors. Across the industry, AMCs and AMFI are conducting investor-awareness programmes, financial-inclusion initiatives and local outreach activities to take the message of financial planning to more parts of India. At TRUST Mutual Fund, our approach is to work closely with distribution partners, use digital tools to extend reach and focus our investor communication on disciplined investing, appropriate asset allocation and long-term wealth creation.