The market has now seen a lengthy bout of both price and time correction. What is your in-house asset allocation model showing, and how do you interpret the scenario?Our in-house asset allocation model has three main pillars: valuations, sentiment, and earnings outlook. After Covid, we had a perfect tailwind for equities, with all three parameters positive. But starting at the beginning of 2024, the framework began throwing up red flags all over the place. First, valuations began moving to near-unprecedented levels. On almost every single metric, valuations were extremely expensive. Now, from an asset allocation perspective, just looking at valuations is not enough, because markets can remain expensive longer than one might think, and vice versa. That is where the sentiment part comes into the picture. We have an in-house sentiment index that tracks a wide variety of factors. It tracks retail investor behaviour, Initial Public Offerings (IPOs), flows, and so on. We put it all together into a simple equity sentiment index with values ranging from -1 to +1. And in the early to mid-part of 2024, that value went up above +0.8. Now, these are normally levels we mark in red, indicating that investors are extremely complacent about equity risks. There is an inverse correlation between the sentiment index value and the next 12-month returns in Nifty. So, the sentiment part was also raising a red flag.The last part, the near-term earnings outlook, the post-Covid base effect had completely worn out. Over time, we were seeing more downgrades than upgrades, which effectively meant people were getting too excited. We couldn’t really see that kind of exuberance in the economy. And so, all three pillars essentially raised a red flag.Our framework moved to one of its lowest equity allocations in 2024, recommending just 20% exposure to equities. It was an extremely cautious stance. Today, it may not seem so radical, but at the time—when market euphoria was at its peak—it was a completely opposing view. That’s precisely why we rely on such frameworks: they are driven by data, not by what anyone thinks.Now, when I think about it, whatever happened in 2025 didn’t come as a surprise. Sometime in 2025, once the markets had corrected quite a bit, the equity allocation moved to 60%, a neutral allocation moved to 60%, a neutral allocation for us. Sentiment, which had risen to +0.8, fell to zero, suggesting the sentiment froth also came off. In earnings, while we were not seeing great upgrades, the extent of downgrades started coming off.So that 60% equity allocation continues even today. Both valuations and sentiment have cooled. Are we at truly mouthwatering levels for equities? The answer is no, because valuations have moved from being very expensive to average, while sentiment has shifted from extremely bullish to neutral. Neither has swung to the other extreme. We are not in a Covid-type scenario where you get excited about equities.RAPID FIREQ.One investing rule you never break...Resist the urge to give in to FOMO (fear of missing out).Q.A trend you think investors are underestimating...There is a lot of liquidityfuelled stock price action. Not all of them are backed by equally commensurate fundamentals.Q.A call you were early on, but still convinced about...Certain bets in the oil & gas sector.Q.The toughest decision you had to take as a fund manager...Adding to ideas that were underperforming significantly in 2019. Price action was terrible, but opportunities looked very attractive.Q.One investing myth you would like to bust...Earnings growth equals stock price return. While true over very long periods, entry valuations matter significantly even over a decadal horizon.Dinesh BalachandranHead—Investments, SBI Funds ManagementAre you still emphasising asset allocation as a strategy, even after this prolonged correction?Asset allocation will, in some sense, be an evergreen solution, no matter what. While there is no denying the long-term compounding power of equities, what we’ve seen over the past two years is that when equities don’t deliver returns for a certain period, a lot of people get very antsy. And that tells you that 100% equity allocation is not the solution for all investors. From that perspective, you definitely need asset allocation products to cater to a wide majority of investors. Even so, we are actively suggesting asset allocation, given our neutral outlook for equities.What levers did you deploy (in portfolio construction) before the onset of the correction? What changes are you making now?One, we increased our cash levels significantly, particularly in the SBI Contra Fund, where we have the leeway to do so. Two, we decided to buy index futures, which provide broad market exposure while we patiently wait for individual stocks to become more attractive. But there is a limit to both. In the contra fund, 85% of the corpus has to be invested in equities. Up to 15% can be in cash. So first we used that lever. And then, since we were struggling to find good stocks, we bought Nifty futures.Even today, we continue to have cash and Nifty index futures, but the allocations have been reduced. Earlier, at the very peak, the fund was close to 13-14% in cash and close to 8-9% in index futures. That has come down to around 5% index futures and around 7-8% cash. This positioning suggests that our outlook has improved, but we are not yet excited.That apart, we were actually recommending the multi-asset allocation fund. This is because our focus has shifted significantly towards inflation and, more importantly, inflation expectations. For example, over the last decade, we’ve had periods when inflation was not high, but inflation expectations have remained anchored at very high levels.To that extent, it’s a bit like the 1970s, which is the last time you really had a stagflationary scenario. While there are differences, that possibility has been a concern for us. That is why we have been advocating multi-asset investing, because the third asset class—precious metals or commodities—tends to perform better in such an environment.Have you changed the extent of active share in your funds?As a fund house, we don’t tend to have a homogeneous view on stocks. We have fund managers with very different investment philosophies. So what I do can be very different from what Srinivasan (SBI MF’s Chief Investment Officer) does or what others do. From that perspective, there is no one-size-fits-all for active share. But speaking for myself, the active share or active risk in my fund definitely came off because I was not getting great highconviction calls. Now, to the extent it is improving, we are again slowly moving towards a portfolio that clearly shows our high-conviction ideas. It is a question of what the market offers.What are the big ideas that you are pursuing now?We have been thinking of two very distinct themes. On the one hand, new-age companies are having an impact across a variety of sectors, disrupting existing businesses and growing at a very rapid clip. There is a bunch of these new-age businesses that we like quite a bit and have been quite active on.The other area we like is the legacy commodity companies. In some sense, they are the diagonal opposite of the spectrum. But we are seeing genuine pricing power returning across many of these companies. Commodity prices are rising due to a demand-supply mismatch, driven by supply disruptions. And this segment is underinvested, offering good opportunities in a few names.How has your view on mid caps and small caps changed?I differentiate quite a bit between mid and small caps. In my opinion, mid-cap is a very narrow category with essentially 150 stocks. It is a very narrow lane and a lot of people are trying to get into it. So just imagine the chaos that it’s creating in terms of valuations. I get very worried that valuations are completely out of whack. While it has perhaps moderated a bit of late, it doesn’t feel like you’re really going to get a great bang for the buck at an aggregate level.Though, in some sense, the market is telling me that I’m wrong in my views, because mid caps have done better than large caps. But even adjusted for the higher growth potential of many mid-cap stocks, it just feels like there’s too much froth. And that is largely a function of the space being defined very narrowly and a lot of money chasing a few names.Small caps are a much more heterogeneous space. It covers a wide variety of companies. I can very easily be negative on small caps and still find 10 small-cap companies I like. Because in small caps, you can afford to be much more of a stock picker. You can easily say that I dislike the index, but still have your portfolio geared towards small caps. That’s the beauty of this space. To that extent, I would be much more comfortable in small caps compared to the mid-cap space.What is the specific thinking or approach behind SBI Contra Fund? Do markets provide enough contrarian ideas now?The central premise behind the Contra fund is the concept of margin of safety. Contra is not about buying low valuation stocks. It’s not merely about buying something because its price has gone down. Market wisdom is often right when it comes to a lot of things. Just because the market doesn’t like something doesn’t make it a contrarian bet. Information technology is a perfect example. The market doesn’t like IT sector at this point. Does that automatically make it a contrarian bet? No, I think you have to dig deeper than that.Contra is essentially about ensuring a healthy margin of safety, where we get attractive risk-reward prospects without making overly rosy assumptions. The best contrarian bets are those where people sold a long time ago. It’s not even on anyone’s radar. So when there is improvement happening, no one is really paying attention to it because no one is even looking at it. Those are the bets that you really want to take.Now, frankly speaking, this was easier to do at the turn of the decade when so many sectors were written off. It was easy to take on that contrarian bet. Unfortunately, there aren’t any particularly obvious contrarian bets right now. Most talk about IT and Fast-Moving Consumer Goods (FMCG), for example, because they haven’t done well over the last five years. But just because they haven’t done well doesn’t automatically make them great contrarian bets. You also have to ask, are valuations truly in my favour? And even if valuations are truly in your favour, has the business model been structurally disrupted? There are no obvious contrarian sectoral bets today. They are more at the stock level rather than at the overall sector level at this point.How has your investing philosophy evolved to reflect today’s market realities?A decade ago, I was a lot more obsessed with trying to time market lows. Buying stocks at their cheapest gave an intellectual kick. But time teaches you many lessons. You realise that waiting for the absolute low might not give you the best returns.Let’s assume I invested in a stock when its price hit rock bottom. But over the next decade, that stock just doubled from those levels. Did I do a good job? Absolutely no. I might have caught the very bottom, but I got the stock’s basic thesis wrong. On the other hand, let’s assume I didn’t really catch the absolute bottom but understood a theme to be very powerful reasonably early on. That is a much better outcome.I realised that ultimately, waiting for the thesis to evolve a bit and then acting aggressively, is much better than trying to catch the exact bottom. At the exact bottom, you probably are not even going to size the position very significantly, because there will be so many questions swirling around that particular stock at that point. Even the most dire contrarian will probably start with a modest allocation. Even when it does well, it does not lead to great performance attribution. You’re much better off buying at a slightly later point and waiting for your thesis, and then taking aggressive bets at that point.