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INTRODUCTION MFs ARE VERY SIMPLE PRODUCTS, NOT COMPLEX INSTRUMENTS MR. MILIND BARVE, MD, HDFC ASSET MANAGEMENT COMPANY
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THIS IS A GOOD TIME TO INVEST, WE ARE VERY POSITIVE MR. SUNDEEP SIKKA, CEO, RELIANCE CAPITAL ASSET MANAGEMENT
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MARKETS REMAIN FAIRLY VALUED WITH AN UPWARD BIAS MR. NIMESH SHAH, MD & CEO, ICICI PRUDENTIAL ASSET MANAGEMENT COMPANY
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MFs AS PART OF RGESS ENDORSES AMCS’ CAPABILITIES MR. A. BALASUBRAMANIAN, CEO, BIRLA SUN LIFE ASSET MANAGEMENT COMPANY
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EXPECT CAPEX TO PICK UP OVER THE NEXT 12-18 MONTHS MR. S. NAGANATH, PRESIDENT & CIO, DSP BLACKROCK INVESTMENT MANAGERS
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AVOID TIMING THE MARKETS, TARGET LONG TERM OBJECTIVES MR. AKSHAY GUPTA, MD & CEO, PEERLESS FUND MANAGEMENT COMPANY
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INTEREST RATES WILL DECLINE WITH BENIGN INFLATION MR. DHAWAL DALAL, EVP & HEAD – FIXED INCOME, DSP BLACKROCK INVESTMENT MANAGERS
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TAX BREAKS TO TARGETED SET OF INVESTORS WILL HELP MF INDUSTRY MR. DEEPAK KUMAR CHATTERJEE, MD & CEO, SBI FUNDS MANAGEMENT
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MIGRATE FROM NAV BASED INVESTING TO GOAL BASED INVESTING MR. JAIDEEP BHATTACHARYA, MD, BARODA PIONEER ASSET MANAGEMENT COMPANY
HT Mutual Funds Whiz-Kids Wisdom Team Media Marketing: Ameet Dhanda, General Manager – Media Marketing, HT Media Ltd Tony D’Souza, Asst General Manager – Media Marketing, HT Media Ltd Hardik Mehta, Dy. Manager – Media Marketing, HT Media Ltd Research and Editorial: Sumeet Mehta, CEO, Paradigm Advisors Designed & Printed at: HT Burda Media Ltd, Plot No. 8, Udyog Vihar Industrial Area, Greater Noida, Gautam Budh Nagar, UTTAR PRADESH 201 306 Published by: HT Media Ltd, Ground Floor, Mahalaxmi Engineering Estate, Next to KJ Khilnani High School, Mahim (W), Mumbai, MAHARASHTRA 400 016 OCTOBER 2012
MUTUAL FUND Whiz-Kid’s Wisdom
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INTRODUCTION utual fund is no more a new buzz amongst urban and educated investors. This vehicle of pooling investors’ capital for investing in primary and secondary markets started with Unit Trust of India (UTI) in 1963. UTI’s flagship scheme – US64 was the first mutual fund scheme in the country. In 1987, government allowed entry of public sector in mutual funds industry by allowing public sector banks and financial institutions including insurance companies setting up asset management companies. Entry of PSUs resulted in overall growth in the industry, with assets of Rs. 47,004 crores under management.
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Liberalization and entry of private players was the buzzword in 1993. With dramatic and significant reforms in economy in general and capital markets in particular, private sector mutual funds were allowed to set shops. Securities and Exchanges Board of India (SEBI) was set up as the capital markets regulator in 1993 and was accorded jurisdiction to oversee and regulate mutual funds. Within a decade, fund houses increased to 33 and assets under management jumped to Rs. 1,21,805 crores. After a decade of reforms, next wave of reforms came in 2003 with bifurcation of UTI and more so allowing foreign fund houses to start operations in India. Lead by rise in disposable income and equity cult in urban India, mutual funds saw significant rise in its assets under management. Today, mutual funds industry has 44 funds managing around Rs. 7,50,000 crores of assets. Today, after a decade of growth and challenges, industry stands on one more new trajectory. Industry has lately seen challenging times due to weak investor sentiments and uncertainty in equity markets. This called for a need to encourage industry to look beyond top 15 cities that are contributing a bulk of corpus. Finance Minister had announced the scheme offering tax incentives to first time investors in semi-urban and rural India investing in equities. When we met Mr. Jimmy Patel, CEO of Quantum Mutual Fund, he opined: “This is a much required initiative to convert savings into productive investments leading to employment generation and economic growth”.
investors who lack in-depth understanding and experience of investing in equities and need professionals to manage their investments, and also for the industry that is struggling for growth in its AUMs. At the same time, SEBI announced a series of measures to help the industry. Mr. Patel told us, “This was a challenging task for SEBI, who had to balance its dual role of regulator and industry developer, and we are extremely happy with SEBI’s proposals, as it will help industry to grow and has improved transparency and measures to ensure investors protection”. This was why we decided to come out with this special feature wherein we compile views of CxOs of Mutual Funds. In the process we met more than 20 CEOs and selected a set of few very interesting and different views, which are compiled here. The objective was to educate investors on economy, markets, investing styles and preferences, and CEO’s views on SEBI’s recent announcements. Equity markets stand at equally interesting cross roads. The Government was severely criticized for policy paralysis came out strongly with a slew of reforms. Investors and industry strongly and vehemently advocated for reforms. Markets moved up by more than 15% since reforms were announced, before softening a bit. However, when we met more than 20 fund managers, we found very interesting perspectives on economy. While all unanimously agreed on the need for fuel price hike, reduction in subsidy burden, and need to kick start capital investments in corporate sector to enable economic growth, many CEOs proposed the need to restart disinvestment to augment revenues and bring deficit under control. Inflation was other area of concern for all. This feature endeavors to compile select views of select CEOs out of more than 20 CxOs we met up for the benefit of our readers. We are sure this feature would help our readers appreciate the fact that managing investments is a full time job that should be best left to professionals, who do it 24X7. Happy Reading!
With representations from SEBI and AMFI, Central Government has allowed investments in mutual funds eligible for this tax incentive. This is a welcome move for the
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HT Mutual Funds Whiz-Kid’s Wisdom Team
MFs ARE VERY SIMPLE PRODUCTS, NOT COMPLEX INSTRUMENTS Do you believe that SEBI’s move to encourage retail investors beyond top 15 cities to invest in mutual funds will be successful? Mr. Milind Barve, MD, HDFC Asset Management Company
Can you throw more light on recent announcements by SEBI and what lead SEBI to decide on the same? Since May 2012, SEBI had engaged various industry players – asset management companies, distributors, independent financial advisors, banks, registrars and transfer agents, and investor associations – to evaluate comprehensive measures to help in growth of industry and benefit investors. The objectives were threefold. First was to recognize the fact that mutual fund products were sold in top 15 cities only and deliberate on ways and means to increase penetration. Second was to help investors stay invested for the long term. The third objective was to improve standards of disclosure. The recommendations were evaluated and proposals were made by the MF Advisory Committee and then considered by SEBI. How do you see SEBI’s recommendations on increasing penetration of mutual funds in semi-urban India? Over the last several months SEBI has stressed on the need to expand reach of Mutual Funds. In addition, the Finance Minister has also said that steps need to be taken to channelize savings into investment products like Mutual Funds rather than gold. Given the background, SEBI has notified wide ranging reforms for the Mutual Fund sector which would provide incentives to the fund houses to expand reach beyond 15 cities. There is lack of penetration of Mutual Funds in smaller cities and to improve this SEBI has allowed Mutual Funds to charge additional expenses of up to 0.30% of daily assets subject to certain conditions. This SEBI move is an extremely ingenuous move which is outcome driven. It is estimated that the total TER may not go up to 30 bps but may be in the range of 10-20 bps for most equity funds. The additional TER so charged will be utilized towards distribution expenses to expand reach in smaller cities.
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Attracting investments in financial assets, be it banks, insurance and mutual funds, is a national challenge. In fact, less than 40% of household savings got channelized in financial savings last year. The reason is that the real interest rates have been negative over last 12-18 months. In such a situation, people have preferred physical assets like gold and real estate. This is mainly because in an inflationary regime, asset prices will also appreciate and hence physical assets will offer higher returns when compared with financial assets. People will shift once again to financial assets once real interest rates are positive. It is pertinent to note that among financial assets; almost 55% of household financial savings is in Bank FDs. This is because they are able to understand the product easily and find the process is equally easy and quick. At the same time, majority of the retail investors in semi-urban India seem to be unaware about the fact that even mutual fund schemes are equally simple and easy to understand and invest in. The recent SEBI reforms will help improve awareness of Mutual Funds. Along with better distribution reach, higher product disclosure, simplified investing norms, regulation of distributors, allowance of cash transactions up to Rs. 20,000, etc SEBI’s move to improve penetration beyond top 15 cities should fructify in the long run. What is your advice to our readers on investing in current market scenario? Which type of equity and debt schemes must our readers opt for? My advice to investors would be to invest in diversified equity schemes and avoid thematic schemes. Investors who want to take a measured exposure to equity can invest in a balanced fund. For personal cash management, I would advice retail investors to prefer liquid schemes over savings bank account. This is because liquid funds offer returns of 8% plus with extremely high liquidity which is available with a savings bank account.
THIS IS A GOOD TIME TO INVEST, WE ARE VERY POSITIVE
Mr. Sundeep Sikka, CEO, Reliance Capital Asset Management
How do you see current market conditions and whether Indian investors would return in equity markets?
year, the announcements are directionally important for the markets in terms of providing the much required confidence.
The biggest positive is that everybody is negative. Somehow, there has been lot of negativity about how things have been moving in the economy. But any country that has gone through secular Bull Run is bound to go through such phases. Hence, there isn’t much to worry. As far as we are concerned this is a good time to invest as there won’t be much downside from here. There may be headwinds in the near term but our long term story is very much intact. We are very positive.
What is your take on corporate earnings growth and do you find prevailing valuations justified?
What are the challenges in attracting retail investors to equities? I believe there is lack of understanding amongst investors. They need to be educated. Opportunities are going to be there for both existing as well as potential mutual fund investors. Majority of investors invest only for equities and about 80% of investors are from top 10 cities. The bigger opportunity lies with investors who have never invested in mutual funds. From long term point of view, I think investing in equities is important. I would suggest investors have a complete portfolio. Like, an individual who has never invested in MFs but has invested in equities may look at MF industry from debt or a gold point of view. It is all about having a balanced portfolio. We clearly believe a retail investor should keep investing regularly through SIPs rather than trying to time the market. What is you view on macro economy in wake of these recent announcements and developments? Do you believe increased inflation due to fuel price hike would affect growth? The diesel price hike would add about 55 Bps to the inflation directly and have a similar indirect impact. Although inflationary in the short term, the announcement along with other reform measures such as allowing FDI in sectors like Multi-Brand Retail, aviation and broad-cast services and disinvestment plans are extremely good for the long-term. The initiatives would help bring down the fiscal deficit marginally this
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We expect the FY 13 Sensex EPS to be around 1250 and therefore, based on the current index values, the index is trading at a PE of about 14.5, which is fairly reasonable considering the future growth prospects and long term historical average valuations. We also expect the FY 14 earnings to have a positive bias with the improving macroeconomic conditions. What is Reliance Mutual Fund’s approach to investing in equities and shortlisting stocks? While we keep a close track of the global developments and broader market scenario, we lay a lot of emphasis on assessing individual stocks. Many times, fundamentals, valuation and opportunities presented by individual stocks could be very different from the broader markets, which help us create alpha, the additional returns that we generate over the broader index. We have one of the largest teams in the fund management & research side and we believe there are opportunities that exist in large companies and equally attractive opportunities in the midcap space. What are the investment themes which are finding attention of professional investors in current market scenario? Which sectors do you like and why? Which sectors are you avoiding and why? Sector valuations have been rather skewed and distorted in the last few years due to extreme risk aversion amongst investors. While some stocks in selective sectors are trading much higher than their historic highs, some stocks in other sectors are trading well below their intrinsic values, providing us with exciting opportunities for investments. We are keeping a close track of the various sectors and making appropriate investment choices in our different funds.
MARKETS REMAIN FAIRLY VALUED WITH AN UPWARD BIAS investments into equity markets or investing in products that benefit out of volatility. We believe that with the increasing awareness and regular efforts at spreading cognizance of investing by fund houses like us, coupled with performance delivery will eventually result in increasing investor participation. What are the challenges faced by Mutual Fund industry in current scenario? The most important challenge has come from the economy and markets itself. Over the last 5 years weak markets and domestic and global factors have continued to impact investor sentiment. With mutual funds being relative performers, this has also had an impact on investor interest in the category. With the latest reforms announced by the government, economic fundamentals have started to improve and we expect investor sentiment to improve as well. However, there needs to be continuation of reform action and execution.
Mr. Nimesh Shah, MD & CEO, ICICI Prudential Asset Management Company
Amidst volatile, directionless, and uncertain markets, do you see retail investors returning back to equity markets? Volatility in equity markets has become the new normal. In a range bound market, volatility provides opportunity as has been the case over the last few years and investors rather than being deterred by volatility should look at capitalizing on it. There are various investment avenues that can be leveraged to effectively capitalize on volatility. For instance, investing in mutual fund through a systematic approach helps to capitalize on volatility and is ideal than direct
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Finally the biggest challenge is to get more and more retail investors into mutual funds. ICICI Prudential has been focusing on this and has been actively working in the area of category awareness. What do you think is required to succeed in the mutual fund space? With introduction of RGESS, do you expect retail investors would return to stock markets via MF route? Mutual Funds today are one of the best investment avenues for retail investors. Initiatives like RGESS are therefore a step in the right direction and will surely help increase penetration of mutual funds. Additionally there is a need to
create more and more awareness of the potential of mutual funds by category awareness and investor education. How do you view current valuations and what are your expectations of corporate earnings growth over next two years?
Europe and other emerging economies like China. Therefore, India will continue to grow in the long term. In an environment where liquidity is being created by the Central banks globally, an emerging market without a credit bubble like India is benefitted. Which sectors do you like in current scenario and why?
On the Indian equity market front, sentiments have been significantly boosted by progressive government action. This is clearly reflecting in the recent market rally. Markets continue to be fairly valued with an upside bias. In our opinion, the Indian market even today factors only disinvestment. If the government is able to facilitate further consolidation of the fiscal deficit through means other than that of disinvestment, through means like efficient taxation, initiatives towards stepping up the investment cycle etc, it can significantly add to the upside potential of the market. If disinvestment were to be the only vehicle to raise money, while the market may be buoyant, the fact that so much paper is being issued will keep an upward lid on the markets. Corporate earnings will be muted in the near term and is a function of the economy and is a bit backward looking. July and August were two months where economic data was below average. Monsoons while having picked up were also slightly delayed than last year. A combination of these reasons directionally indicates that earnings will be subdued. However, the earning season is not as important as the reform prospects of the government in the next 6 months to 1 year which will be the key determinant of market direction and sentiment. Would warnings and concerns raised by international rating agencies impact inbound investments – especially FII investments? How do you see risk capital seeking Indian paper and outlook of inbound flows amidst Euro Zone crisis? Where does it fare vis-à-vis other emerging markets? With the latest flurry of reforms taken up by the government, the risk of any downgrade has been mitigated. With regards to FII flows, FII’s are not a homogeneous group on investors. They look at relative attractiveness of markets, basis which they decide on geographic allocation of investments. In our opinion FII flows is coming out of the fact that most global economies except countries like India, Thailand, Philippines and Indonesia are suffering from a credit crisis. With reference to India, India is a structural growth story with favorable demographics, strong domestic consumption and strong balance sheets across banks/ corporates. As Indian economy is not leveraged there is no risk of credit bubble to impair long term growth potential as against
We have been investing in pharma since 2007 because of inherent defensiveness of this sector. We have also been looking cyclically at upstream oil and telecom sectors because both these sectors are attractively valued. Also we are overweight select midcaps that are available at attractive valuations. Which sectors would you avoid and why? We are currently underweight sectors like consumer staples given that they are trading at record high valuations. If you have to advise retail investors to buy mutual fund units, which debt and equity products would you suggest in current market conditions? It is difficult to predict market direction, however, volatility will clearly be the order of the day i.e. market will not be unidirectional. Globally, economies are going through a debt de-leveraging cycle. In such a scenario, equities seldom provide unidirectional multi bagger returns. Therefore with volatility emerging as the new normal, investors should look towards capitalizing on this trend through flexi cap dynamic funds. Also even in scenarios where markets are at fair value, there exists pockets of valuation attractiveness which can help add value to an investor’s portfolio. Value funds can help identify these pockets of valuation attractiveness. The other crucial factor is following asset allocation through investing in debt mutual funds. While equity continues to be an important asset class requiring continues participation by retail investors, debt mutual fund also holds tremendous potential. However, even after several years of introduction and innovation, investing in fixed income mutual fund products is largely a bastion of institutional investors in India. Retail investor participation in this asset class through mutual funds is negligible given its potential. Post government’s measures on fiscal consolidation, there is expectation that RBI may support government’s effort through monetary action. Further RBI is likely to conduct OMOs to ease liquidity. These measures will be positive for long duration funds and offers a reasonable opportunity to enter Gilt and Income funds in current situation. OCTOBER 2012
MUTUAL FUND Whiz-Kid’s Wisdom
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MFs AS PART OF RGESS ENDORSES AMCs’ CAPABILITIES
Mr. A. Balasubramanian, CEO, Birla Sun Life Asset Management Company
It is understood that despite rate cuts, investments would not pick up as banks would start de-leveraging to bring down their credit deposit ratio. Hence, belief of reduction in interest rates would boost economic growth is uncertain. What is your take on this? In the recent past, the Government has recognized the need to push rate of investment in building infrastructure to revive the economic growth. The recent slowdown reflects in the banks’ declining credit deposit ratio. While the Government has to do their bit to ignite the investment demand in the country, any serious steps in this direction need to be supported by moderate interest rate regime. Lower interest regime can be achieved through various RBI measures as well as banks’ ability to reduce lending rate through reduction in cost of their deposit. We believe combination of both could become the reality. What is your view on the currently prevailing debt market scenario? We as a Fund House have been maintaining a strong case for
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lower interest rate regime through reduction of repo rate as well as CRR. As it is, the current slowdown in the economy which has hit the bottom of close to 5% will stay between 5.50%-6% for a considerable period of time. We believe that the inflationary trend in India may finally get moderated supported by the commodity prices leading to reduction manufacturing inflation. While fiscal reduction is the key for a rate cut, there have been various steps taken on the part of the Government to reduce expenditure through subsidies reduction. This augurs well for lowering interest rate in the next few quarters. What is your investment strategy for debt your debt schemes? Consequent to the previous point, we believe debt funds with duration focus will deliver good return. As a Fund House, we have been holding our view until a few months to stay invested for a 2-3 year duration. Having now seen a drop in short term rates resulting in steepening of curve, we believe in building high duration across some of debt schemes that are meant for higher duration.
Which are the investment themes which will work in this market scenario?
What would your representations to committee to frame a national mutual fund policy be?
We believe equity market valuations have been pushed to the lowest on the back of lower growth in the economy. However, the recent measures to revive growth, supported by an expectation of interest rate reduction, makes a case for building equity as an investment theme. Having said this, fixed income duration products will also give better experience to Investors. Therefore, a right combination of both the asset classes may work very well for investors.
The Mutual Fund industry has been playing a very important role in the Capital market space. Even after two decades of existence, the industry manages only about Rs.2,00,000 crores in equity and Rs.5,00,000 crore in debt. Given the high potential of Indian investors’ savings, there is a very strong case for the industry to have size which is equivalent to that of the Banks. In the US, the size of the Mutual Fund industry is bigger than that of the banking industry. In the recent past, there has been very strong support to promote mutual fund products to retail investors and various steps are being considered towards this. Any policy which gets national recognition through the Parliament Act or any other means, will project the necessary importance of this industry which serves the nation in building a strong capital market and serves the long term needs of Indian savers.
If you have to advise retail investors to buy mutual fund units, which debt and equity products would you suggest in current market conditions? In the debt category, investors have to look at funds that are actively managed in duration. This essentially means funds that are in the short term bond funds and income funds category. This is largely driven by interest rate view as we move forward. In the case of equity, retail investors would be better off choosing funds that are largely large cap focused in the diversified equity category. How do you view SEBI allowing fund houses paying higher expense ratios for catering to investors in smaller cities? Will this deter retail investors in smaller cities with lesser penetration to invest in MFs? The recent changes in the SEBI guideline are helping the industry to grow more and penetrate into Tier II cities. A clear focus is emerging - to expand distribution channels as well as investor awareness across these cities. This obviously, will come with marginal increase in cost however; the long term benefit of accruing investors through right participation of mutual schemes will negate the marginal increase in cost. Ultimately, this investment to meet investor needs helps towards the long term goal of the mutual fund industry. Therefore, marginal cost increase should not act as a detriment. What are the challenges for the industry in increasing its penetration beyond top 15 cities and towns? What is the kind of opportunity do you see in raising capital from smaller cities? We believe that the wealth effect in the country is immense and it needs to be tapped through the right channels and mediums. This is where the focus to build distribution channels and creating investor awareness is coming back in a big way. Therefore, the task is to channelize potential investment advisors to distribute mutual fund products and make them build a long term business model that helps serve investors with need.
Do you believe tax benefits under Rajiv Gandhi Equity Savings Scheme will help the MF industry? As I see it, allowing mutual fund schemes to be part of the Rajiv Gandhi Scheme is an endorsement of the ability of Mutual Fund Managers in managing retail money. Long term performance of equity mutual funds, especially in the diversified category is very encouraging. Therefore, the endorsement from the Ministry of Finance in including Mutual Fund schemes as part of the Rajiv Gandhi equity schemes is a step in the right direction, Also as it ultimately helps tax payers to save more tax than they currently enjoy, I am sure investors/tax payers will avail this facility in this financial year itself (i.e. before 31st March 2012) Mutual funds can be a greater force to enforce corporate governance. Except for stray instances like Satyam where institutional investors unearthed the scam, we haven’t seen active involvement of mutual funds in this space. Can you share your views on how MFs can contribute to effective oversight of corporate governance? Mutual Fund Portfolio Managers have been expressing their views on Corporate Governance through proxy voting. Every investment made in various companies through our mutual fund schemes are monitored, not only for their performance but even for various initiatives that will have long term bearing in creation of share holders value. Wherever it is felt against the best interest of shares holders, Mutual Fund managers do convey their reaction through Proxy voting. I am sure this will go a long way in ensuring that the interests of share holders are taken care to a larger extent. OCTOBER 2012
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EXPECT CAPEX TO PICK UP OVER THE NEXT 12-18 MONTHS What is your view on corporate earnings and earnings growth for next year? What is your view of valuations of Indian markets vis-à-vis other emerging markets? We expect corporates to post an earnings growth of around 15% p.a. over the next 2–3 years. Markets are currently trading around 15 times 1 year forward earnings. Historically markets have traded in a Price Earnings band of 10–20 times earnings over last 20 years. Right now markets are trading at around the median PE. So if markets are volatile amidst uncertainty, the P/E multiple of the market may decline to 12–13 times or alternatively rise to around 17–18 times, if sentiment turns positive. There is room for PE expansion on the back of accelerated GDP growth. India’s growth rate relative to other larger emerging markets is still attractive and this will underpin strong investor interest in the medium to long term. Which are the investment themes which will work in this market scenario? There are three themes that largely drive economic growth. The first is consumption. India has a huge domestic market. A large population and rising rural demand for consumer goods, on the back of higher disposable income, drives higher consumption. India’s consumer demand shall continue to remain strong in the medium term and hence would boost growth. The second theme is investments. Infrastructure and corporate capex spending picking up and increase in inbound investments would trigger a trickle down impact on all downstream sectors. We witnessed a significant rise in capital spending up to 2008. Therefafter investment spending slowed down in the aftermath of the financial crisis. We expect capex spending to pick up again over the next 12-18 months, on the back of an improved outlook for the economy. The third driver of growth is exports. While there are some growth challenges in certain export oriented sectors, overall, we think the growth momentum will be maintained. What is your investment strategy for 6 -12 month horizon? Mr. S. Naganath, President & CIO, DSP BlackRock Investment Managers
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We remain optimistic over a 6-12 month investment horizon
since we expect the growth momentum to pick up, interest rates to decline and the currency to strengthen during this time horizon. How do you see the markets in wake of broad global and local macro environment and recent slew of reforms in India? GDP has shown a sequential growth. What are your views on GDP growth going forward?
Deferring GAAR to AY 2017-18 has improved sentiments in the market. Do you believe inflows will increase in wake of this deferment? Is this move healthy for the market and economy over a longer term? We expect investor interest and portfolio inflows to remain strong over the medium to long term. How do you see global scenario impacting FII flows?
The US economy appears to be steadily progressing in terms of its growth momentum. However, the Eurozone crisis is a cause for concern. Till policy makers arrive at a decision, markets would see heightened levels of volatility. Of course, the long term implications of increased liquidity on inflation have to be analysed. With regard to the Indian economy, we expect a GDP growth of 5.5 to 6.5% in FY13 and 6.5-7.0% GDP growth in FY14. India’s growth rate will be relatively higher when compared with other large emerging or developed economies. We see inflation as a concern on the back of the recent fuel price hike. We expect inflation to be around 7% over the next couple of years. What are the stock selection parameters and stock screening methodology that you have adopted in your fund? Our prime focus is on evaluating long term trends in return on equity. Our stock selection process is a bottom up approach supported by a top down research of the economy and various sectors. Many companies are sitting on huge cash. We have heard concerns of slowing growth in many companies sitting with huge cash. Now Infosys has started inorganic growth. What is you view on valuations of companies sitting with huge cash balances? We believe that companies know what is best for them. Our focus – as a fund house – is to identify good businesses with equally good management, and then trust the management to explore various options for spearheading growth, either organically or inorganically. However, we constantly review the trend in Return on Equity.
Relatively higher economic growth rate in India is likely to attract more FII flows over the medium to long term. What is your view on outlook of crude oil in short term? In medium term of 6 – 12 months, what is your take on crude prices? Crude would continue to remain stable unless we see any spike in oil prices due to geopolitics. What is your take on rupee in short term? We expect the rupee to remain stable in the range of Rs. 53 – Rs. 56 against the US Dollar, in the near term What are the key triggers for rupee for the near-term? Softer oil prices and better market sentiment could lead to rupee appreciation in the near term. How do you see global commodities performing in next 2 – 3 years? What is your take on global commodities stocks? Global commodities will be stable to positive over the next 2-3 years as softer demand is somewhat offset by price appreciation due to global quantitative easing policies. Which sectors would you find attractive in this markets? Also, please advise which sectors should investors prefer to remain underweight.
How do you see risk capital seeking Indian equities?
We are overweight on defensive sectors like FMCG, pharma and IT. The revenue of FMCG companies would continue to grow on the back of sustainable consumer spending and confidence. Pharma companies have performed well and we believe that they would continue to perform well going forward. IT would be a steady performer.
Investors will find Indian equities attractive given the relatively higher economic growth rate in India compared to other larger emerging markets, the strong trend in consumption demand and the wide choice of companies to invest in across different sectors.
As for other sectors, we believe that capital goods and infrastructure companies may show greater growth momentum next fiscal year. Banks look interesting over the medium term due to growth prospects, even as the near term sentiment for the sector is subdued due to a slowdown in credit offtake. OCTOBER 2012
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Mr. Akshay Gupta, MD & CEO, Peerless Fund Management Company
AVOID TIMING THE MARKETS, TARGET LONG TERM OBJECTIVES
What is your view on economic scenario globally and how events in EuroZone, US, and China will impact emerging markets in general and India in particular?
this should lead to strong currency in the short to medium term. Over the long run, rupee will be dictated by global oil prices and trade deficit.
We are currently witnessing very tepid growth in developed economies. Lower consumption and growth in the developed world will adversely impact export oriented emerging economies over the medium to long-term.
What is your view on valuations of Indian markets and where does Indian markets valuations stand compared to other emerging market peers?
In line with expectations, another round of Quantitative Easing has been adopted by FED to revive the slowing US economy. Positive steps announced by ECB and backed by German support have brought in the much needed confidence in the Euro zone. That said, fears persist about the extra sovereign leverage and hence bail-outs required. In addition, China is slowing down and thus their central bank has taken monetary measures to boost the economy. With monetary infusion occurring simultaneously at global level, risk-on strategy is prevalent. This strong global liquidity is definitely helping emerging economies including India. Equity markets have rallied since monetary easing has been announced. Foreign flows (FII) have put brakes on the sliding currency, which benefits the nation on the fiscal front. Lower global growth could also negate the rising commodity prices and thus benefit India in form of lower inflation. Rupee has sharply reacted to announcements of allowing FDI and strengthened compared to US Dollar. How do you see rupee moving in short to medium term and what are the triggers for the same? Strong foreign flows or even commitment of the same should give good support to the rupee. The forex market runs a lot on sentiment. Renewed hopes of reforms taking place should encourage investments and thus improve overall macros. All
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OCTOBER 2012
At current levels, market valuations are just below 14 times on a forward basis. Thus, valuations are reasonable but not cheap. Indian market valuations have always got premium over some of the other emerging markets; mainly on account of better return ratios and more wide-spread domestic strength of the economy. Even presently, it is quoting at a premium to most of the other emerging markets. Do you see FII inflows increasing and whether global risk capital will get attracted to Indian paper? Share of global flows for India is still on the lower end of the spectrum. Though close to US$ 18 bn (over INR 900 bn) of net foreign flows have come to Indian equities in this calendar year, strong global liquidity can bring in more flows. If the spate of reforms continues without any roll backs, FIIs can invest much more money. What is your investment strategy in the market conditions? What is Peerless MF’s approach to investing in equities and what are those critical aspects which you would want to see in an investment opportunity to take exposure? Our basic strategy is to identify sectors and themes that exhibit steady and linear growth potential and are core to the economic growth. Market movements in recent times are tilted towards large caps and we believe that is likely to continue for some more time. We have a blend of top-down and bottom-
up approach; pick stocks that generate good growth and are available at reasonable valuations. Business Cycles neutrality, market leadership, low leverage, unwavering business model, high returns on equity and reasonable valuations are some of the important criteria that we look at while identifying our picks. What is your take on global commodities like oil, precious, ferrous and non ferrous metals? How do you see global commodity stocks as investment option in this market? Global slowdown will lower the demand for global commodities over the next few years. In the near term, quantitative easing from US and rupee depreciation has led to rise in commodity prices including precious metals. Gold has been rising because of genuine consumption demand, interest from various central banks as an alternative currency and increased liquidity. However, the rise in crude and metals does not seem sustainable unless we see higher global growth. RBI has sounded out that it may opt for rate cuts by Oct or Nov. Do you believe that in this inflationary regime, it would be possible for RBI to cut rates? What is your take on interest rates in short to medium term and key triggers for any significant changes in interest rates? Monsoons have picked up smartly and the fear one had on account of high food inflation has receded for now. Core inflation however continues to be above the comfort level and is not showing any signs of softening out. Fuel prices and currency movement will play a crucial role going forward as to what the overall numbers will look like. Softening of core inflation on a sustainable basis should be the first trigger for the central bank to cut key rates. Base rate effect will come in handy from December 2012. Also the government has started to do its bit on the supply side, which the RBI has been signaling for the past few quarters. Hence, we expect rates to soften over the 6-9 months by 50-100 bps. How do you see debt markets reacting to 25 bps CRR cut and what is your strategy on investing in debt papers? The CRR cut was on expected lines since cutting repo rates was not something RBI would have done until inflation came closer to its comfort levels. This CRR cut would infuse about Rs. 17,000 Cr into the system. The net effect of this cut was to see the yield curve steepening. The short end of the curve saw yield moving down and the medium term to long term yields moving up. Our strategy for money market funds was to maintain low duration and invest in short maturity assets. In our long duration funds we have increased duration as we expect RBI to cut rates in the next 6 months.
How do you see rate sensitive sectors like banking and real estate in wake of these announcements and expected developments? A cut in CRR by 25bps roughly brings in additional INR 17,000 Cr in the system. This is definitely good for the banking sector. Also, going forward more banks are likely to cut their deposit rates; thereby improving their NIMs. One can expect further strengthening of credit growth over the medium term due to lower lending rates. Combine this with key infrastructural reform process, one can safely say that banks look reasonably better than what they were 1 month back. We understand that banks would have to de-leverage to improve their credit-deposit ratio. Do you see this affecting their advances growth? With the reforms process gaining momentum, investment activity picks up and this directly helps credit growth. However, at a larger level, one needs to see a decent growth in the retail deposits since RBI has come out with guidelines on Bulk deposits and CD issuances. Which are the sectors you find attractive for next 3 – 6 months and why? Which sector would you avoid for next 3 – 6 months and why? Rate sensitive sectors and Investment themes (Infrastructure) have under-performed in this market. In anticipation of further progress in reforms and softening of rates; these sectors are expected to do well in the near term. In addition, domestic consumption related sectors like FMCG, Cement, Pharma, Auto etc will continue to do well. Specific IT companies that have gained market share will outperform. Global economies would continue to show signs of weakness and hence one can avoid commodity sectors like Oil, Metals and Mining related sectors. Policy affected sectors like Real-Estate and Telecom can also be temporarily avoided till further clarity emerges. What is your advice to retail investors on investing in this market? If you have to suggest one debt fund product and one equity product to retail investor, which would that be? Retail investors should avoid the trap of timing the market and thus SIP/STP in a diversified equity scheme with an objective to generate good returns over the long term should be an appropriate product for retail investors. One debt fund that we suggest would be Short Term Income Fund. With RBI set to cut rates during the next two quarters, we feel that yields in the bond market should tend lower and any fund with a mix of medium to high duration bonds and good quality short term liquid papers would post the biggest risk adjusted gains when any rate cut materializes. OCTOBER 2012
MUTUAL FUND Whiz-Kid’s Wisdom
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INTEREST RATES WILL DECLINE WITH BENIGN INFLATION GDP has shown a sequential growth. What are your views on GDP growth going forward? The economy has been slowing down recently. After growing at an average rate of around 7.5% between 2004 and 2009, the rate of growth has declined to around 5.5% in the last two quarters. Market participants attribute this slowdown to a combination of factors such as subdued global growth as well as declining consumption demand and slower investment spending. We believe that if the government speeds up the pace of reforms and if the global growth scenario remains conducive, then we believe India’s GDP growth would begin to accelerate in the medium term. How do you foresee inflation going forward? Wholesale inflation for August stands at around 7.5%. The recent fuel price hike will have a direct impact of around 65 to 70 basis points on headline inflation and additional 25 – 30 basis points due to the trickle down impact. All in all, we expect the recent revision in fuel prices to add around 100 basis points resulting in inflation at around 8.5% in the near-term. Although, we believe inflation has peaked out in the near term, we are closely following the trajectory of core inflation (non-food manufacturing) which stands at around 5.6%. While crude oil, gold and metal prices do react to global demand & supply, we are seeing commodity prices soften and the rupee strengthening, which bodes well for inflation in the near-term. However, we don’t see headline inflation softening below 7% at least till March 2013. What is your take on rupee in short term? What are the key triggers for rupee for near-term? Mr. Dhawal Dalal, EVP & Head – Fixed Income, DSP BlackRock Investment Managers
The rupee has strengthened by around 8% since September 1, 2012 due to recent spate of announcements by the government
Fixed income investment options help you manage your investment portfolio by adding a strong foundation for times when markets are doing well and equally for times when the financial environment may be uncertain. Presenting DSP BlackRock Income Opportunities Fund, a fixed income investment option which constantly seeks opportunities to optimize portfolio yield and minimise volatility by dynamically managing allocation to different fixed income assets such as money market instruments, G-Secs & corporate bonds.
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MUTUAL FUND Whiz-Kid’s Wisdom
OCTOBER 2012
on reforms. We have seen rupee move up from around 56 to one US Dollar to around 53.5. Going forward we expect the rupee to trade in the band of 51 – 54 against the US Dollar. However, if we see significant inflows as a result of reforms or improvement in economic conditions, then the rupee may even strengthen to around 50. What is your view on the prevailing debt market scenario? What is you outlook on 10 year yield in 3 – 6 months? The RBI has been reluctant to reduce interest rates for quite some time due to heightened inflationary pressures despite weak economic growth. On various occasions, the RBI has announced that its comfort zone for inflation is around 5%. However, we believe that the RBI has been easing by stealth i.e. by adding to the systemic liquidity. All these liquidity enhancement measures have resulted in the softening of interest rates at the short-end of the curve. For example, 3M bank CD yields which were hovering at around 10.5% p.a. in March 2012 have fallen to around 8.5% p.a. by September 2012. Going forward, we expect the RBI to further improve systemic liquidity that may result in further softening of interest rates. Moreover, banks are experiencing a slowdown in credit off-take recently and therefore have huge cash balances which are invested in government bonds. All these measures are likely to have a positive impact on the term-structure of interest rates, and we expect the benchmark 10 Year yield to trade between 7.75% to 8% in the next 3 to 6 months. Please explain what you mean by RBI easing liquidity by stealth? How does it happen?
infuse additional liquidity of Rs 1 trillion by buying government bonds and further liberalizing refinancing limits. What are the risks you see in the market? We are keenly observing various macro variables. We discern a few concerns in the prevailing market environment. One concern is the deteriorating credit rating environment where we are likely to witness more credit rating downgrades than upgrades. A credit rating downgrade of a borrower generally highlights various risks which may hamper the borrower’s ability to meet his obligations and may likely result in an increase in its borrowing costs. Our second concern is a tighter relative credit spreads. Credit spread is the extra yield demanded by market participants over government bonds. Current spreads for AAA rated assets are comparatively narrower from their 3-year average. Even the yield curve for AAA rated corporate bonds is relatively flat. This means that if an investor looks at investing in longer tenure papers, he will get a coupon rate only marginally higher than the shorter term securities. This means that there is little incentive for investors to buy longer-tenor bonds. Recent reform initiatives by the government may result in a lower fiscal deficit in the future. What are those critical triggers for RBI to go ahead for a rate cut? The RBI needs to see an improvement on three fronts. First: government measures to achieve reduce fiscal deficit, second: inflation moderating. Third: government measures to accelerate growth. Positive momentum on one or all factors could lead to rate cuts. We expect the RBI to announce rate cuts in the first quarter of calendar year 2013. Which debt schemes would you advice to investors?
The RBI undertook open market operations (OMO) which alone infused around Rs. 80,000 crore in the system since April 1, 2012. Recent CRR cut of 25 basis points was a positive move, which infused another Rs. 17,000 crore in the system. The RBI had also increased banks’ refinancing facility limits on exports. Overall, the RBI has increased systemic liquidity by around Rs. 1.3 trillion. Going forward, the RBI has plans to
Every investor has a different investment horizon and risk profile that needs consideration before recommending any scheme or product. I would suggest that investors must consider liquid and liquid plus schemes for shorter tenure. For longer term, investors can consider Fixed Maturity Plans and Monthly Income Plans.
OCTOBER 2012
MUTUAL FUND Whiz-Kid’s Wisdom
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Mr. Deepak Kumar Chatterjee, MD & CEO, SBI Funds Management
How do you view SEBI allowing fund houses paying higher expense ratios for catering to investors in smaller cities? Will this deter retail investors in smaller cities with lesser penetration to invest in MFs? We have to look at this in the overall context. Today one of the main reasons for low penetration of MFs is poor distribution of and awareness about MF products. With a small change in over all expenses, we now have the potential to reach out to small towns and make a strong go for the smallest of small investors with a view to bringing to them the benefits of capital markets. If you compare with an upfront load of 2.25% paid earlier by investors, a very small 0.3% increase in expense ratio to increase penetration is reasonable justification. Also the new regulation provides investors the option to invest direct at lower cost with effect from Jan 2013. What would your representations to committee framing National Mutual Fund Policy be? Firstly, we will be very pleased to see such an initiative take shape. While, a lot has been done in recent regulatory changes to boost our industry, we would like to see major changes being made in the way investors save for their retirement. We would like to see a plan similar to 401 K plan in the US which encourages compulsory long term investments. A MF policy will also give the general direction of policy initiatives over a period of time - some kind of a future vision of where this industry should be in, say, ten years’ time. What is your view on the currently prevailing debt market scenario? We believe that over the last few months, the RBI actions have ensured that the system liquidity deficit stays within the comfort zone, creating an enabling environment for a gradual
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MUTUAL FUND Whiz-Kid’s Wisdom
OCTOBER 2012
TAX BREAKS TO TARGETED SET OF INVESTORS WILL HELP MF INDUSTRY downward movement in market interest rates. Top rated Credit spreads in the bond market have tightened significantly in the recent past. Government bond yields have remained relatively stable around 8.15% recently. The market liquidity situation could incrementally tighten going forward on account of seasonal factors such as festive season withdrawals and second half credit growth. We anticipate the RBI to conduct OMO’s in the second half consistent with the monetary stance of pro actively managing liquidity within the system. What is your investment strategy for investing in fixed income securities in your debt schemes? The debt schemes have been adopting a cautious view on credit exposures considering the prevailing macro economic conditions. However we have been quite aggressive regarding interest rate strategies. Our income and short term schemes have benefited from the recent downward movement in market interest rates, especially on the corporate bond space. We anticipate at least 50bps policy rate reduction over next 6 months. This would result in benefit arising from the anticipated downward movement in policy rates. If you have to advise retail investors to buy mutual fund units, which debt and equity products would you suggest in current market conditions? Retail investors with long term investment horizon would do well to continue to invest in equity funds with good track record and those with short term horizon can continue to park their short term surplus funds in income / ultra short term schemes and optimize their portfolio to benefit from the prevailing high interest rate scenario. The ultra short schemes are typically suited for parking unutilized lazy money, and the investments can be for as low as three days, without any exit load, or for as long as one wants. Retail investors should also look at FMPs of different maturities as they are tax efficient.
MIGRATE FROM NAV BASED INVESTING TO GOAL BASED INVESTING
Mr. Jaideep Bhattacharya, MD, Baroda Pioneer Asset Management Company
How do you view SEBI allowing fund houses paying higher expense ratios for catering to investors in smaller cities? Will this deter retail investors in smaller cities with lesser penetration to invest in MFs? Reaching out to investors in Tier III and Tier IV towns is not easy. When you compare mutual fund industry that has not more than 40 odd thousand distributors with insurance industry which has more than 20 lakh agents, you will find that mutual fund industry does not have adequate penetration. We need more advisors and intermediaries to reach out to investors. There is a need for investor education and ofcourse a distribution network to service investors. While investors may complain about higher cost and compare it with immediate to short term returns, we have to focus on long term objectives for which we have started investing in mutual funds. Shift in investment objective from NAV based investing to goal based investing is the need of the hour. What are the challenges for the industry in increasing its penetration beyond top 15 cities and towns? What is the kind of opportunity do you see in raising capital from smaller cities? Mutual funds rank 7th in the list of investment options utilized by investors in “Bharat”. While rural India has tremendous propensity to save, it is not converted into investments leading to employment. Industry needs to work
with NGOs on various investor education and awareness initiatives in rural India to orient them on benefits of mutual funds as an investment alternative. This is where industry in general and we at Baroda Pioneer are working on innovative products which would work well in Tier III towns and beyond. One of our initiatives is designing treasury products for SMEs. There are many such innovative products which can be created for investors in specific category. This kind of innovation will help mutual funds to penetrate in Tier III towns and beyond and thus grow. Can you please elaborate more on your treasury product for SMEs? SMEs in industrial clusters – like Jalandhar, Tirupur and various other similar Tier III towns and beyond do not have access to skillsets in managing their treasury operations. Here, we are working on structuring specific treasury products which would suit their requirements. This is a challenging task wherein we have to start with indepth research in business cycles and then structuring a product which suits the requirements of the SMEs of a particular sector in a particular industrial cluster. SEBI has reintroduced entry load. Will this move stop investors to invest in existing schemes? Why does a mutual fund investor come to a mutual fund? Does he come for cost or for returns? Does a 30 basis point matter or he will look for return which is much higher than in a bank? My understanding is the investors in mutual fund come for returns. So if we look at consumer behavior why he comes to a mutual fund the primary reason is he wants higher return than from comparable asset classes and alternative investment avenues. In a country like India where interest rates are higher we always have choice. Mutual funds are fighting for space across various investment options. An investor does not come to save cost but to get higher returns. OCTOBER 2012
MUTUAL FUND Whiz-Kid’s Wisdom
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Addition of exit load to fund AUM is a great move in encouraging long term investors and reducing portfolio churning. How do you see this from a fund managers perspective and how challenging it is if a fund has more churning vis-à-vis a fund which has less churning? How does the investment strategy change if a fund has lesser churning? From a fund management perspective you need stability of the portfolio whether you are on the debt side or equity side. If you believe that 20-25% of portfolio is going to move around then you have limited options to buy. Second is putting the customer at the core and to see what is good for the customer. If an investor is investing in equities he must invest with a 3-5 years horizon. If an investor does not have that kind of long term horizon, he must avoid equities. Instead for less than 3 years tenure, investor must prefer debt or hybrid products. At the point of sale we need to have a expectation match between what a fund house can deliver and what an investor expects. So my view is the best person to do it is the advisor. I am of a firm view that advisor needs to keep the investor’s needs and objectives in mind. His role is to believe in creating long-term value. I believe it is good move and churning for the sake of churning is not good for any stake holders – be it fund houses, advisors, and investors. What is your view on the currently prevailing debt market scenario? Recently, the corporate bond yields have rallied due to better liquidity condition and expectation of rate cut from RBI after strong fiscal consolidation measures taken by Government. We expect RBI to take rate action in second half of financial year and may cut rates by 50bps to support growth if inflation moderates from current level. After the fiscal consolidation measures taken by the government, RBI may go for a 25bps rate cut in the October policy. However, the inflation remains a concern for RBI. The inflation reading was at 7.81% in September after the diesel price hike. The recent cool off in global crude oil price along with rupee appreciation may reduce inflation in future. As the ultra-short term papers have come down therefore, we see value in medium to long term maturity papers. We expect the 10 year GOI to trade in the range of 8% to 8.25% in near term and should move down in medium term as inflation moderates and RBI takes rate action. However, higher supply, high fiscal deficit and persistent inflation remain concern for the bond market. Lower domestic and global growth, any rate action by RBI along with OMO should act as positive trigger for Bond market. What is your investment strategy for debt products? In the income funds, we are increasing our tenure as we
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MUTUAL FUND Whiz-Kid’s Wisdom
OCTOBER 2012
expect rates to soften in next 6 to 12 months. Recently rates have rallied in short term papers; therefore, we see more value in medium to long term paper. The long term government bonds also look attractive as the spread of gilts to corporate have come down. What is the advisable allocation for fixed income in investors’ portfolio? We are advising clients to invest in short to long term income funds depending on risk appetite and tenure of investment. We expect these funds to outperform normal carry products like Liquid and Treasury in next 6 to 12 months. What is your opinion on current valuations? To some extent, the current rally in equity market is an optimism-driven rally aided by flows. At current levels, I feel that market is fairly valued. I feel that apart from the optimism from government action, improvement in corporate earnings will help market in future. Improvement in margins due to lower commodity prices, lower interest rate scenario, and government actions to kick-start investment activity will lead to a possibility of better than expected earnings, going forward. This will help to improve valuation further in future. What is your investment strategy for equities over next 6 12 month horizon? The recent rally in equity market is an optimism-driven rally aided by flows. The sustainability of these flows over the near term would depend upon global development. So we have to keep a close watch on European situation and global data flows, which are quite dynamic and changing frequently. In addition, domestic policy and news flow also would be a key to sentiment. Domestic economy seems to be bottoming out. Any progress on key reforms will remove bottlenecks in infrastructure and lead to fiscal consolidation. Hence we need to select and stick with companies that will benefits from revival, reforms and RBI action. Which equity products should the investors opt for in current market scenario? In the current market scenario, the investor should invest through SIP route equity diversified schemes for long term objectives. For conservative investors, Balanced Funds and MIP schemes are better options. This is because investors will get the benefit from falling interest rate scenario on Fixed Income portion coupled with upside coming from buoyant equity markets.