As India’s corporate giants step up investments in emerging sectors, conglomerate funds are drawing growing interest from investors seeking diversified exposure. In a conversation with Fortune India, Harish Krishnan, co-CIO and head of equity at Aditya Birla Sun Life AMC, explains why conglomerates — with their deep pockets and multi-sector reach — are poised to drive the next phase of growth. He discusses how these funds balance risk and opportunity, and why patient investors could be rewarded as India’s investment cycle gathers pace.

Excerpt:

Q: To start with, could you explain what conglomerate funds are and how they differ from sectoral, thematic or diversified equity funds?

Sure. Just as there are PSU funds or MNC funds, where the ownership structure is the key differentiator, conglomerate funds are built around business houses that own more than two listed companies operating in different sectors.

So, our definition of a conglomerate is any business group with at least two listed companies in different sectors. There are roughly 30 such business houses in India, with around 150 to 160 listed companies that form the universe for this fund.

The main difference from sectoral or thematic funds is ownership. In sectoral or thematic funds, the focus is on a particular theme or sector. But in conglomerate funds, we invest across sectors based on ownership, just like MNC or PSU funds are based on who owns the companies.

Q: I noticed your fund has performed reasonably well since its launch, though not exceptionally. What factors have influenced this performance?

We launched the fund in December last year, so it’s been less than a year since inception. Our thesis was based on a few ideas.

First, we noticed that many investors already own shares of large business houses, often through legacy holdings. Over long periods, say, 20 years, these have been exceptional wealth creators, though their returns tend to come in cycles. They might underperform for a few years and then suddenly deliver strong returns in a short span.

By diversifying across business houses within the fund, we can better time our exposure to different groups, depending on their phase in the cycle. This diversification within business houses helps reduce the risks individual investors might face when investing directly in just one conglomerate.

Q: You mentioned diversification as a key advantage. Are there other reasons that make this fund distinct?

Yes, a few. One major point is that conglomerates account for nearly half of India’s total listed CapEx today. Although they contribute about 30–33% of total profits, their share of CapEx is close to 50%. This means they are investing heavily for future growth, and as this CapEx starts yielding results over the next three to four years, it could significantly boost profit pools.

Another distinction is that conglomerate funds can invest in holding companies, which traditional funds usually avoid due to historical tax structures and valuation complexities. In our case, we can invest up to about 10–15% in holding companies. This adds another layer of opportunity and differentiation.

Q: Since conglomerates contribute nearly half of India’s private CapEx, how do you see them positioned to capture opportunities in emerging sectors like EVs, green energy, semiconductors and defence?

Because these groups operate across multiple sectors and have access to large pools of capital, they are uniquely positioned to invest in capital-intensive, long-gestation industries like semiconductors, solar energy or defence manufacturing.

These are sectors where the entry barrier is high, and only a handful of large business houses can make multi-billion-dollar commitments. For example, only two or three conglomerates are leading India’s current push into solar and semiconductor manufacturing.

While the benefits from these investments might take three to five years to materialise, these conglomerates are likely to emerge as key beneficiaries as these new industries mature.

Q: Coming to your conglomerate fund’s portfolio, around 47% is in large caps, 22% in mid-caps and 16% in small caps. What’s the reasoning behind this mix?

We don’t start with a fixed target allocation for large, mid, or small caps. Instead, we first decide which business houses — out of about 30 that we track — we want to back. Currently, we have chosen around 15–16 groups.

Then, within those groups, we identify which companies are best placed in terms of execution, capital allocation and potential value creation. Naturally, some business houses have more large-cap companies, while others are more mid- or small-cap focused.

So, our cap allocation is an outcome, not an input. It flows organically from the business houses we choose to invest in.

Q: How do you see domestic institutional investors (DIIs) influencing market stability, mainly when global shocks occur?

DIIs have become strong shock absorbers for the market. Today, we have three main sources of market flows — domestic institutions like mutual funds and insurance companies, foreign institutional investors (FIIs), and retail/HNI investors.

FIIs tend to be pro-cyclical — they invest more when markets are booming and pull out quickly during uncertainty. DIIs, on the other hand, have steady SIP inflows and a long-term focus, which makes them counter-cyclical.

So, while DIIs can’t control prices, they help stabilise markets during periods of heavy foreign selling, thus limiting volatility and protecting long-term investors.

Q: Many conglomerates operate through holding company structures. How do you approach valuations and identify long-term value in such cases?

We look at multiple valuation metrics — price-to-book, enterprise value to invested capital, and the potential profit pools from ongoing CapEx. We also study how each group is positioning its investment cycle relative to peers.

In aggregate, conglomerates account for about one-third of India’s profits and around 34–35% of total market capitalisation, which is roughly aligned. Since they are also responsible for half of India’s CapEx, we believe their earnings growth potential is strong, and valuations are reasonable.

As earnings catch up over the next few years, these companies are likely to deliver better performance than the broader market.

Q: Do you expect the fund to generate alpha in the next three to five years?

Yes, we do. Most companies today are focused on optimising return on equity (ROE) rather than investing for growth. Our fund, in contrast, is backing those who are actively investing in the economy.

Historically, such businesses tend to outperform when the investment cycle picks up. Given the current valuation comfort and the margin of safety across many groups, we believe this fund has strong alpha potential over a three- to five-year horizon.

Q: Several AMCs are launching AI-managed funds. How do you view this trend? Are you also integrating AI in your fund management process?

We definitely use technology (including AI) for quantitative analysis, screening, and monitoring. But investing isn’t purely a science; it’s also an art.

Patience, conviction and the ability to hold a stock through challenging phases are qualities that can’t be automated. Technology helps improve efficiency and accuracy, but judgment and experience remain irreplaceable.

So, our approach is a blend of man and machine, combining human insight with technological support rather than depending solely on one.

Q: How should retail investors view this theme, and what investment horizon should they consider?

This is a long-term theme. Investors should have at least a five-year horizon to benefit meaningfully. The idea is to be patient and allow these business houses to realise the value of their investments over time.

Also, investors shouldn’t put all their money into one theme. A balanced asset allocation — across equities, fixed income, real estate and gold — is essential. Diversification and patience are the two key principles to building sustainable wealth.

Q: Finally, what would you suggest for investors right now — conglomerate funds or consumption funds?

Both have their merits, but they are quite different. Consumption funds are more diversified — they cover almost 65% of India’s market capitalisation, including financials and FMCG. Conglomerates account for around 34%.

Both offer reasonable valuation comfort and the potential to create value, but they cater to slightly different investor objectives. It’s not about choosing one over the other — both can complement each other in a well-diversified portfolio.