Baron India Fund: Latest Insights and Commentary

Emerging market (EM) equities delivered another quarter of relative outperformance, extending strong momentum from 2025. The first two months of 2026 saw EM markets post solid double-digit gains, driven largely by AI-related technology companies and broad-based strength in industrials. However, markets faced a late-quarter inflection after the U.S. and Israel attacked Iran, triggering a sharp rise in oil price and increased global uncertainty. While this shift introduced near-term volatility, EM equities remained supported by durable fundamentals and continued to outperform developed markets on a relative basis. 

Indian equities experienced a material drawdown during the period but staged a notable recovery, rebounding from late-quarter lows as market conditions stabilized. While geopolitical outcomes remain uncertain, there is cautious optimism that tensions will ease or that energy prices will normalize from elevated levels over time. History suggests that markets tend to recover and ultimately strengthen following major global disruptions, and we believe the current environment will prove no different. 

Periods of volatility created opportunities to selectively add high-quality businesses at more attractive valuations, while disciplined risk management frameworks helped provide downside risk management during market turbulence. Despite recent drawdowns, domestic investor participation has remained constructive, supported by the continued financialization of household savings and steady inflows into equity investment vehicles. With foreign investor ownership near multi-year lows and valuation multiples trading below long-term averages, current conditions suggest the market may be approaching a cyclical bottom. 

Looking ahead, we remain encouraged by India’s structural growth trajectory and believe the market is entering a potential earnings upgrade cycle. A rebound in government infrastructure spending, targeted policy support for consumers, and improving economic indicators are expected to support stronger corporate earnings. Assuming energy prices moderate over the near term, the current environment presents an attractive opportunity to build positions ahead of improving earnings momentum. 

CONTRIBUTORS

• This Fund does not have contributors to performance for period ending March 31, 2026

DETRACTORS

• HDFC Bank Limited is one of India’s largest and most recognized private sector banks, offering a broad range of financial services to retail and commercial clients. Shares fell during the quarter due to both company-specific and macroeconomic concerns. The unexpected resignation of HDFC Bank’s chairman created a governance overhang as investors sought clarity on his departure. Subsequent communication from the board and management helped restore confidence by emphasizing that there were no underlying wrongdoing issues and that governance standards remain strong. On the macro side, given India’s heavy reliance on imported energy, higher crude prices have raised inflation expectations, widened the current account deficit, and increased the likelihood of tighter monetary policy, all of which have dampened loan growth and credit outlooks across the banking system. Despite these near-term headwinds, HDFC Bank remains a compelling long-term investment, supported by its best-in-class underwriting, strong liability franchise, and long runway for growth in an underpenetrated banking market, positioning it well to compound earnings as liquidity conditions normalize and macro pressures ease.
• Bharti Airtel Limited is a leading telecommunications company with operations across Asia and Africa. The company’s offerings include wireless services, mobile commerce, and fixed-line broadband. While Bharti Airtel reported strong quarterly earnings and provided visibility into robust future free cash flow generation, shares declined during the quarter due to concerns around capital allocation to the company’s new non-banking financial company venture. In our view, as India’s dominant mobile operator, Bharti Airtel is benefiting from ongoing industry consolidation. In particular, competitor Vodafone Idea appears to be on the verge of bankruptcy amid severe pricing pressure and an unsustainable balance sheet. We retain conviction in Bharti Airtel’s outlook as it transforms into a digital services company and capitalizes on rising mobile tariffs.
• Bajaj Finance Limited is a leading non-bank financial company in India. Shares declined during the quarter as geopolitical tensions over the past month raised expectations of higher inflation and disrupted India’s easing interest rate environment, which could negatively impact consumption-led credit growth. We retain conviction in the company due to its best-in-class management team, robust long-term growth outlook, and conservative risk management frameworks. We believe Bajaj is well positioned to benefit from growing demand for consumer financial services in India, including mortgages, personal loans, credit cards, and other related products.

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

In a challenging quarter for Indian equities, Baron India Fund (the Fund) declined 14.86% (Institutional Shares), outperforming the MSCI AC Asia ex Japan/India Linked Index (the Index), which declined 18.13%, by 327 basis points. While India equities continued to face headwinds from Foreign Institutional Investor outflows, disappointing corporate earnings, and rising energy prices related to the Iran war (the country imports most of its crude oil), solid stock selection allowed the Fund to hold up better than the Index in the period.

On a sector level, solid stock selection in Industrials and Information Technology (IT) drove outperformance in the period, with most of the strength coming from holdings in the Make in India/supply chain diversification, national security, and power reforms themes. Performance in Industrials was bolstered by gains from select holdings in the Make in India/supply chain diversification (Precision Wires India Limited), power reforms (Kirloskar Oil Engines Limited and Cummins India Limited), and national security (Bharat Electronics Limited) themes. A portion of gains in IT were attributable to strong performance from electronic manufacturing services provider Centum Electronics Limited (national security), whose stock price rose 13.9% in the period. Stock selection in IT was enhanced by our decision to remain materially underweight IT consulting & other services companies owing to structural growth headwinds related to the advancement of AI. Cash exposure in a down market and higher exposure to the outperforming Health Care sector contributed another 95-plus basis points of relative gains.

Somewhat offsetting the above was disappointing stock selection in Financials coupled with lower exposure to the better performing Materials and Energy sectors. Weakness in Financials came from a handful of the Fund’s consumer finance (Cholamandalam Investment and Finance Company Limited, Bajaj Finserv Limited, and Bajaj Finance Limited) and financialization of savings (360 ONE WAM Limited and Nuvama Wealth Management Limited) holdings.

From an S-curve growth perspective, while all four groups declined against a difficult backdrop for Indian equities, the Fund’s holdings in Phase 1 – Under the Radar / Investment Mode, Phase 2 – Disruptors / Scale Builders, and Phase 3 – Compounders held up better than the Index. The only group to trail the Index was Phase 4 - Mature Businesses / Market Performers, owing mostly to sharp declines from HDFC Bank Limited and Tata Consultancy Services Limited.