At a time when Indian markets are navigating valuation resets, shifting global flows and evolving growth drivers, Sailesh Raj Bhan, President & CIO-Equity Investments at Nippon India Mutual Fund, offers a perspective on where opportunities are emerging.He has been managing multiple flagship funds, namely, Nippon India Large Cap Fund, Nippon India Multi Cap Fund and Nippon India Pharma Fund for over 20 years.In this conversation with ET Wealth, he unpacks how the Union Budget 2026 reinforces earnings visibility through sustained public capex and continued consumption support. He also explains why concerns among foreign investors about valuations, exposure to artificial intelligence (AI), and currency risks are gradually easing, setting the stage for a potential revival in Foreign Institutional Investor (FII) inflows as earnings recover. Bhan also outlines key risks to the rally, from crude oil shocks to prolonged geopolitical tensions, while flagging pharma and consumption as the market’s most compelling contrarian bets. Edited excerpts from an interview with Abhinav Kaul:Which sectors would have an immediate impact on earnings from the budget announcements?The budget rests on a few clear frameworks with near-term earnings implications. First is the long-term push on data centres, including duty exemptions and tax benefits extending up to 20 years. Such directional policy signals can create significant opportunities across the data centre ecosystem. Second is continuity in government capex (capital expenditure). A 10% rise may look modest, but on a base that has grown from about `3 lakh crore to `12 lakh crore over the past decade, even a `1 lakh crore increase is meaningful. Roads, railways, defence and core infrastructure have all seen roughly 10% allocations, reinforcing the investment cycle despite softer Goods & Services Tax (GST) collections.Third, consumption remains supported. There were no adverse changes to income tax, and past GST cuts continue to aid discretionary demand, with benefits likely to play out over the next few years. Together, these factors support discretionary consumption, public and private capex recovery, and sectors such as industrials, power, engineering and data-centre ancillaries, largely domestic-oriented businesses are poised to benefit.RAPID FIREQ.A book that shaped your investing framework?More Than You Know: Finding Financial Wisdom in Unconventional Places by Michael MauboussinQ.What is your personal asset allocation right now?Around 70% in equity.Q.One portfolio rule you almost never break?Don’t overpay for growth.Q.A sector where you’re most willing to be contrarian today?Power.Q.A call you’re still early on, but confident about?Pharma.Q.The toughest decision you’ve had to take as fund managerLetting go of short-term gains or momentum for creating long-term portfolios.Sailesh Raj BhanPresident & CIO-Equity Investments,Nippon India Mutual FundHas the budget done enough to bring FIIs back?Foreign institutional investors have been net sellers for an extended period, driven by several factors. First, Indian equities were trading at a steep premium, nearly 80% to MSCI index, which made valuations difficult to justify. Over the past 12-18 months, other markets have outperformed, narrowing this premium to about 40%, which is closer to long-term averages and no longer a major concern.Second, India lacked a meaningful AIled growth story. Global markets such as the US, Korea and Taiwan benefited from their position in the AI supply chain, while India’s growth moderated over the last two years. Third, uncertainty around trade deals raised concerns about currency stability, making India less attractive to foreign investors sensitive to currency losses amid slower growth.Many of these headwinds are now easing. The AI-led rally has largely played out globally, valuations in India have adjusted, and trade-related uncertainty is reducing. Earnings growth is also improving, with recent quarterly results being reasonable. Going ahead, GST and income tax support should aid consumption, trade deals could boost exports, and factors like the Pay Commission may add another layer of demand.If earnings growth trends are back to 10-14% in 2006-27 and improve further with global stability, foreign flows should return. This is not a structural issue; India’s scale, demographics and growth potential remain compelling.What global or domestic risks could threaten the market rally?There are a few key risks that could derail the rally. A sharp $20-30 rise in crude oil prices would clearly hurt India’s macro outlook. Prolonged geopolitical tensions, if they persist for another year, could also dent corporate confidence and delay investment decisions. Globally, valuations, especially in the US and other developed markets, have risen sharply, even as growth remains strong, making markets more vulnerable to corrections. Another emerging risk is AI-led disruption, which has already impacted select global sectors. While not an immediate threat to India, it could affect employment and competitiveness if India is seen as a laggard rather than a beneficiary of this technology shift.Which sector is the biggest contrarian bet right now?Two sectors where expectations are particularly low, and therefore offer contrarian opportunities, are pharmaceuticals and consumer, especially consumer discretionary.Historically, when sentiment in the consumer segment is as pessimistic as it is now, outcomes over the next 12-18 months can be meaningfully better than expected. These are large, well-established businesses where investors have given up on near-term growth. Beyond this, areas such as banking, insurance and power also offer potential surprises. Sentiment has been muted despite improving fundamentals, and positioning remains light. We have been gradually increasing our exposure to these segments over the past few months, reflecting our belief that earnings and return ratios can surprise on the upside.Nippon Multi Cap Fund has maintained an exposure of around 25-30% to small caps over the past year. With valuations improving, would you consider increasing midand small-cap exposure?Over the last few months, this scheme’s investments in large-cap stocks have ranged from 42% to 48%, with the balance split between mid- and small-cap stocks, in line with the fund’s mandate.That said, as selective opportunities emerge, we are actively evaluating areas where relative value is becoming attractive. If value starts appearing more meaningfully, say across 30-40% of the small-cap universe, we would consider increasing exposure. This is a relatively recent development; over the last two years, valuations did not offer much comfort.Our approach remains valuation-driven. Any incremental allocation must meet our return expectations, either through price correction or a sharp improvement in earnings visibility. Decisions will depend on how long the corrective phase persists and how fundamentals evolve.What is your view on continued inflows into mid- and small-cap funds despite the correction, and how are you managing the risks?For the past two-and-a-half years, we have restricted inflows into small-cap funds largely to Systematic Investment Plans (SIPs). Our communication to investors has been consistent: unless you have a three-, five- or seven-year investment horizon, mid- and small-cap funds are not suitable, large caps are the better option. This was our stance even during the euphoric phase in September 2024, as impact costs and liquidity risks rose sharply with large inflows.When valuations are unfavourable, we consciously run more diversified portfolios to manage liquidity and reduce stock-specific risk. We also impose strict internal limits on size exposure to stocks and monitor these metrics monthly. While we accept asset-class volatility, we avoid layering additional risks, relying instead on disciplined stock selection to drive returns.What conditions would prompt you to reopen the small-cap fund for lumpsum investments, while continuing SIPs?A strong and visible earnings recovery that expands the investible opportunity set across small-cap stocks must happen, to begin with. The other is a deeper and wider market correction; if 50-60% of small-cap stocks correct meaningfully, investors are better compensated for the risk they take. SIPs have never been stopped, as they help average costs through cycles. Our decision to pause lump-sum inflows was driven by relative expensive valuations in the smallcap space. Over the last year, the return gap between large caps and small caps was nearly 17-18%. If valuations turn favourable and growth outcomes improve, we will revisit the decision.Is there an investment philosophy you once believed in strongly but have since refined or shifted? What triggered the change?The core philosophy has not changed, we have always been very conscious about the price we pay for a business. That discipline comes from years of learning from longterm investors like Warren Buffett, and it remains central to our approach. What has changed is that we have become even more stringent about not overpaying for growth.Over time, we realised that growth assumptions can change far more quickly than investors expect, especially in highly competitive industries. Often, what is perceived as durable growth is actually momentum. Many investors end up paying high multiples assuming that elevated growth rates will persist, when in reality they may not. Our preference is still for growth businesses, but only at sensible or value-backed prices.We are willing to pay a premium for high-quality companies, but that premium has to be justified. During phases like September 2024, valuations across the market became extreme, 50 PE or even 100 PE in several cases, and almost every stock had a perceived compelling narrative. That environment made us even more cautious and selective, preferring to avoid such companies rather than chase them.This discipline is also reflected in our participation in IPOs (Initial Public Offerings). Over the last 12 months, we have stayed out of many IPOs, not because we questioned the quality of the businesses, but because valuations were driven by FOMO (Fear of Missing Out; the tendency to invest just because others are investing and you think you’re late) rather than fundamentals. Overall, the shift has been towards greater valuation discipline and a stronger insistence on adequate compensation for growth risk.Do you hug the index or do you like picking stocks outside the benchmark index?It depends on the scheme’s category. In large-cap funds, we tend to be more indexconscious given the segment’s nature. In mid-cap funds, that awareness reduces, and in small caps, the approach is largely bottom-up. Across portfolios, our primary objective is for 70-80% of returns to come from stock selection rather than macro calls or sector rotation. While we track macro factors, the emphasis is clearly on identifying strong businesses and generating alpha through fundamentals.The extent of deviation from the benchmark is ultimately a risk decision. Each fund has a defined character and an appropriate level of active share, aligned with the consistency we aim to deliver to investors. We cannot alter that character arbitrarily. For instance, a flexi-cap fund cannot swing from being entirely large-cap to entirely small-cap based on short-term opportunities. There is no free return without taking risk, and we operate within a clearly defined framework that balances risk and reward.When opportunities are limited or valuations are unattractive, active share tends to be lower. As opportunities improve, active share increases naturally. Importantly, this flexibility is built into each fund’s design, allowing us to focus on alpha generation without turning portfolios into closet index strategies.