Rajesh Kothari, Founder of ALF Accurate Advisors, believes the answer lies in a disciplined and structured approach to stock selection.
In this edition of ETMarkets AIF Talk, Kothari explains how his proprietary 3M framework—focusing on Market Size, Market Share, and Margin of Safety—helps filter high-quality companies with the potential to generate sustainable wealth while limiting downside risks.
He also shares insights on portfolio construction, sectoral opportunities, and how a strong emphasis on balance sheet quality and market leadership positions his strategy to outperform across cycles. Edited excerpts –
Q) Thanks for your time. Your philosophy revolves around “Protect Capital, Create Wealth.” How do you balance downside protection with wealth creation in volatile markets?
A) We protect capital through the DSD approach: Diversification, Selection and Discipline. We do not invest in businesses which are commodity types business.
Through our 3M investment approach – market size, market share and margin of safety – we buy companies that are market leaders. The leadership enables companies to enjoy pricing power. Hence, they are less vulnerable if inflation goes up.
Similarly, we invest in companies that have under leveraged balance sheet, that make the companies immune to the rising interest rate environment.
This naturally protects downside when the economy is not doing well while positioning the portfolio for stronger upside when the cycle turns.
Q) Can you also quickly take us through the recent performance of the fund?
A)
ETMarkets.comQ) Can you explain your 3M stock selection approach (Market size, Market share, Margin of safety) and how it differentiates you from peers?
A) Our 3M framework- Market Size, Market Share, and Margin of Safety is central to how we identify businesses that can deliver sustainable compounding while managing downside risk.
At the core, we focus on quality stocks. We look for companies with proven management teams, strong balance sheets, consistent earnings growth, and high standards of corporate governance. Beyond this, we evaluate a wide set of financial, longevity, and forensic parameters to ensure the businesses we invest in are both ethical and durable.
Market Size: We prefer companies targeting a large market size to generate exponential returns.
Market Share: We buy companies that are usually market leaders, as they are less vulnerable to external stocks, and in favourable positions to navigate economic cycles.
Margin of Safety: Price is what one pays. Value is what one gets. We believe in Growth at Value, thereby ensuring that the investment opportunities we seize are at reasonable valuations, while also exhibiting sustainable growth potential.
Q) You emphasise that “Founders are Fund Managers”—how does this influence your investment decisions and accountability?
A) “Founders are Fund Managers” ensures strong alignment with investors, as the founders’ own capital is invested alongside client capital. This naturally shifts the focus from salary or bonus-driven decisions to long-term fund performance and capital preservation.
With both reputation and personal capital at stake, accountability is direct and immediate. Additionally, the absence of multiple decision-making layers enables quicker, more decisive actions in response to opportunities and risks.
Q) The portfolio has a strong tilt towards large caps (around 60%) but also meaningful mid and small-cap exposure—how do you decide this allocation dynamically?
A) We have strong risk management. So, for our AAA IOP which is multicap – we have minimum 40% exposure to large cap. Within large, mid and small, we allocate capital depending upon growth and valuations.
Q) Nearly half your portfolio companies have zero net debt—how critical is balance sheet strength in your investment framework?
A) Balance sheet strength is absolutely central to our investment framework. It is one of the most non-negotiable filters in our process.
Our preference for companies with zero or low net debt stems from a simple principle: leverage amplifies risk, especially during periods of uncertainty.
Businesses with strong balance sheets have far greater resilience they are better equipped to withstand economic downturns, manage cash flows prudently, and avoid dilution or distress when conditions tighten.
Q) With FY26E earnings growth for your portfolio significantly higher than Nifty, what are the key sectors or themes driving this growth?
A) We believe in Growth at reasonable valuations. Our portfolio companies must offer higher growth then benchmark. Auto, chemical, capital goods, consumer are key sectors which is delivering growth in FY26. In FY27, banks will also deliver strong growth.
Q) AAAIOP focuses on large, high-quality companies, while AAABB has a strong mid and small-cap tilt—how should investors think about allocating between these strategies?
A) AAAIOP follows a multi-cap approach, with a strong bias towards large, high-quality businesses that offer stability, consistency, and relatively lower drawdowns. It is suited for investors seeking steady compounding with a focus on capital preservation.
On the other hand, AAABB has a higher allocation to mid and small-cap companies, which typically offer higher growth potential but come with greater volatility. This strategy is more suitable for investors with a higher risk appetite and a longer investment horizon, who are comfortable with interim fluctuations in pursuit of superior returns.
Allocation between the two should be guided by an investor’s financial goals, time horizon, and risk tolerance.
Q) With increasing investor interest in alternatives and PMS/AIF products, how do you see allocation trends evolving? What kind of investor profile is best suited for your strategies, given the 3–5 year investment horizon?
A) With increasing investor interest in alternatives and PMS/AIF products, how do you see allocation trends evolving?
Q) What kind of investor profile is best suited for your strategies, given the 3–5 year investment horizon?
A) Our strategies are best suited for investors with a 3–5-year investment horizon who appreciate the power of compounding and are aligned with our philosophy of “Protect Capital, Create Wealth.” Typically, this includes investors who are:
Willing to stay invested through market cycles without reacting to short-term volatility. Focused on quality businesses and sustainable wealth creation rather than tactical gains Comfortable with a disciplined, research-driven approach.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times.)