AI Stock Valuations and Volatility Pose Risks for Investors, Fund Managers Warn

AI’s Promise Meets a Valuation Test for Investors

Fund managers see a real technological shift, but warn that concentrated bets and high expectations leave little room for disappointment.

AI needs to deliver beyond the infrastructure boom

The fund managers did not dismiss artificial intelligence as a passing theme. Harish Krishnan, chief investment officer for equity at Aditya Birla Sun Life AMC, called it a genuine technological shift, but said the investment case would need to translate into meaningful economic benefits over the next 12–18 months to justify expectations. The distinction matters: a technology can be transformative without every company associated with it earning attractive returns.

Several speakers raised the risk that capital and market attention have crowded into a narrow group of AI-related businesses. The trade now extends beyond prominent technology firms to suppliers such as chipmakers, memory manufacturers, power utilities and capital-equipment companies. That breadth may create opportunities, but it can also leave portfolios exposed to a common theme even when holdings appear spread across different industries.

The concern is not simply whether AI works, but whether expected growth and future profits are already reflected in valuations. If companies fail to turn investment into useful applications, productivity gains or revenue, investors could reassess the prices they are willing to pay. The timing of any correction is unknowable, the panellists noted, making valuation discipline more practical than trying to call a market top.

The next beneficiaries may be AI users

Nimesh Chandan of Bajaj Asset Management suggested the next phase could favour companies that use AI to lift revenue, improve productivity or strengthen shareholder returns, rather than only businesses supplying the technology infrastructure. For investors, that shifts the question from “Is this company linked to AI?” to whether the technology can produce measurable business benefits.

The scale of the investment cycle also has implications beyond company earnings. Taher Badshah of Invesco Mutual Fund pointed to AI’s demands on water, power and rare earths, as well as geopolitical competition around the technology. These factors underline why the AI opportunity may have a wider set of beneficiaries and constraints, while making a narrow, theme-led portfolio vulnerable to changing expectations.

Asset allocation can reduce the cost of emotional decisions

The panel’s advice extended beyond AI. Fund managers warned that investors can become anchored to headline indices, chase assets after strong returns or make abrupt decisions during volatile periods. Chandan recommended using investment checklists and pre-committed allocation decisions to help keep choices aligned with a plan. Such discipline cannot prevent losses, but may reduce the risk of changing course solely because market sentiment has shifted.

Sankaran Naren of ICICI Prudential AMC urged investors to pay attention to valuations and market cycles rather than simply follow fund flows. He also advised greater care with small- and mid-cap stocks and less caution towards large-cap stocks in the prevailing environment. Krishnan, meanwhile, said expectations were elevated in areas including capital markets, defence and capital goods, while sentiment was relatively subdued in technology, consumer businesses, private sector banks and insurance. These were the panellists’ market assessments, not assurances about future performance.

Global exposure should complement, not replace, India

The managers also cautioned against switching portfolios simply because overseas equities had recently outperformed Indian markets. Krishnan said currency depreciation alone was not a sufficient reason to move away from Indian equities. He supported selective international diversification in areas where Indian businesses have limited exposure, such as biotechnology and AI, while saying he did not see a case for international investments exceeding 10% of a portfolio.

That view points to diversification as a way to access opportunities, not as a call to abandon domestic holdings. Sivakumar of Axis AMC similarly argued for judging markets by long-term earnings prospects and participating in the global AI opportunity without changing India allocations solely in response to overseas market moves. The appropriate balance will depend on an investor’s goals and ability to tolerate risk.

Key Highlights

• Fund managers see AI as a genuine shift, but say valuations depend on companies delivering economic benefits.
• Concentration across AI suppliers and infrastructure businesses may expose portfolios to the same underlying theme.
• Potential future winners could include companies using AI to improve productivity, revenue or shareholder returns.
• Panellists urged investors to use disciplined allocation rather than chase recent performance or market headlines.
• Selective international exposure was discussed as a complement to, not a substitute for, Indian equities.

Investor Note: Treat AI exposure as an investment thesis that needs evidence of business benefits, not as a label that guarantees growth. Review concentration, valuations and portfolio balance against your own time horizon and risk tolerance before making allocation changes.