Risk Now Squarely on Investors as Banks Exit, Warns ICICI Prudential CIO

At the Morningstar Investment Conference in Mumbai this November, Sankaran Naren, the chief investment officer of ICICI Prudential Asset Management, delivered a diagnosis of India's capital markets that amounts to a structural warning: the machinery of risk absorption has fundamentally changed, and ordinary investors now carry the full weight of it.

For decades, Naren explained, India's industrial growth was underwritten by development financial institutions—IDBI, IFCI, ICICI itself in its earlier form—entities designed to absorb the uncertainty of funding new ventures. That model gave way to another: banks took on investment risk, particularly in the years before 2008. But that era has ended too. Today, neither development institutions nor banks are willing to finance anything genuinely risky. The entire burden has migrated to the investment community itself—to mutual funds, portfolio managers, and the retail investors who feed them capital.

This shift would be merely structural if it were not accompanied by a cascade of behavioral misalignments. Mutual funds have proliferated specialized vehicles to capture investor appetite: small-cap funds, mid-cap funds, flexi-cap funds, thematic funds. Money flows into these buckets steadily, particularly through systematic investment plans. Fund managers face a practical bind: when capital arrives, they must deploy it. If that capital arrives during a period of stretched valuations, they deploy it at stretched valuations. The valuation risk, in other words, does not stay with the fund house. It transfers to the investor who owns the fund.

Naren highlighted a pattern that reveals the asymmetry most starkly. Private equity investors and multinational corporation promoters—groups with deep experience reading market cycles and valuation signals—are selling aggressively into the current environment. They recognize expensive prices when they see them. Meanwhile, retail investors, animated by optimism and the discipline of regular contributions, continue to buy. "Knowledgeable sellers are exiting at expensive valuations while new investors are entering," Naren observed. The market is absorbing sophisticated capital on the way out and retail capital on the way in.

There is also the matter of what investors say they will do versus what they actually do. Nearly everyone claims a twenty-year investment horizon. Very few remain invested for even ten years. When markets correct—as they inevitably do—the gap between stated patience and actual behavior becomes visible. Investors exit, crystallizing losses, and the discipline they promised themselves evaporates. This is not a failure of character. It is a predictable feature of how people behave under stress. But it is a feature that Naren sees as particularly dangerous in the current setup, where valuations are already elevated and the margin for error is thin.

Naren was careful to separate this warning from any claim about India's economic fundamentals. The underlying economy is sound. Growth drivers remain in place. The macro environment is supportive. The problem is not the country. The problem is the concentration of investor portfolios into a single asset class at a moment when that asset class is expensive and when the structural capacity to absorb losses has been hollowed out. The solution, he argued, is not to abandon equities but to build genuine diversification: fixed income instruments, balanced advantage funds, a real allocation across asset classes rather than a token nod to diversification while keeping ninety percent in stocks. "Asset allocation is the only way to stay safe," he concluded. Without it, the current market setup amounts to a test of whether retail investors can absorb losses that, in earlier eras, would have been distributed across institutions designed to bear them.