The Hindu Business Line : ‘Indian markets will emerge as the best performer’

Mumbai, May 24 The volatility in the capital markets has grown by leaps and bounds, putting most retail investors on a wait-and-watch mode. Mutual funds, the retail investors’ vehicle for investment in equity, may have disappointed investors. However, a few equity mutual fund schemes have just turned profitable after last week’s rally. Mr Sandesh Kirkire, Chief Executive Officer, Kotak Asset Management, in an interview to Business Line said the first quarter numbers will dictate the trend of the market.

Will the recovery in equity markets sustain, given that nothing in the economy has changed except for a stable Government in place now?

It is not an all-round recovery, but it is happening in patches. After the debacle in the December quarter, there was some recovery in March and it is continuing. Certain sectors that are dependent on domestic demand are doing well, but some segments that are linked to overseas market are still struggling with the global economic recession yet to subside. India has not seen such low interest rate regime in the recent past. Low interest rate will boost consumer spending thereby pushing up domestic demand. Unlike global markets, we have not seen a negative growth so far. Though the pace of growth may slow down, we will still grow at 6 per cent. Investors are waiting for the first quarter numbers to take a call on FY’10 earning expectations. The recovery is going to be a slow process. Hopefully by the end of this quarter everything will be clear.

Does the global fund flow indicate recovery?

Markets are driven by sentiment, and sentiment improved after a stable Government moved in place. Earlier, foreign investors had withdrawn from all the emerging markets. In April, foreign fund flow has increased. With sentiments already improving, Indian markets will emerge as the best performer. What we had seen in December quarter was really a credit crunch leading to loss of faith and interest among the investing community.

What is the share of mutual funds in the domestic institutional investment in equity?

Not much. Whatever that has come in was largely through insurance companies. In fact, against the investment of Rs 40,000-45,000 crore in equity in FY’08, mutual funds contributed less than Rs 4,000 crore. However, net inflow in equity markets by domestic institutions, including insurance and mutual funds, was higher than that of FIIs in FY’08, when the market witnessed the largest FII inflow. Domestic hands are getting stronger, but still that conviction is not there.

There are concerns over black money stashed abroad finding its way into the market through participatory notes. What are your views?

Though lot has been talked about black money entering India, there is no data to prove the extent of fund flow, if at all it has happened. The allegation of black money flowing back into the country has been there for many years without any proof. Ultimately, all markets are driven by liquidity and where it comes from is not the concern of market participants.

MFs seem to be holding more cash after the financial crunch in December quarter? Has things changed?

In equities schemes cash holding has everything to do with the market sentiment, which was hit by huge liquidation by the foreign investors in the third quarter of FY’09. Loss of sentiment led to 15-25 per cent cash holding in many mutual fund schemes. Ever since, the cash holding has declined close to 10 per cent.

Holding cash of 10 per cent is also pretty high. Isn’t it?

Holding cash works both ways. When the market is going down there will be no place to hide. Then cash helps. In any case, close to 5 per cent is always kept in cash even in the most bullish phase. We are moving closer to that. Having seen such a large rally in a short period of time, there is a tendency to book profit, which will add to cash holding. The fact is the markets are now trading between 12 and 13 per cent of FY’10 earnings, which is not really cheap. When Sensex was trading between 8,000 and 10,000, we were in cheap territory. Recently the market was moving irrationally high.

Investors over Rs 1 crore do not pay any fee while small investors have to cough out 2.25 per cent of their investments. Do you think there is an anomaly here?

This problem relates to only equity schemes which work on a cost structure. Investment in equity schemes requires an advice more so for the small investors. The fees charged are nothing but the cost of advice and distribution. The proposal of a variable load structure is already pending with SEBI. Anyway, Indian mutual funds have the lowest cost structure in the world.

Will the New Pension Scheme (NPS), with lower charges, have advantages over mutual funds?

NPS will have its own space as it is designed for long term. Money can be taken out only at the time of retirement. Mutual fund investments are typically for five years. On the cost front, NPS will be ranked on top followed by mutual fund and then insurance. NPS investment in the equities will only deepen the markets further. In fact, less than five per cent of our financial assets are in equity.

Why hasn’t gold ETF (exchange traded fund) taken off as it was envisaged?

It is the lack of distribution channel and financial literacy that is driving down ETF products. There is no distribution revenue for selling these products. As there are no earnings out of distribution, nobody wants to sell these products. If not for these drawbacks, ETF is one of the best products for people who want to invest in gold. Holding the yellow metal in demat makes it more convenient than having it in the physical form.

Related Stories:
Equity mutual funds back on investors’ radar
Mutual funds’ asset base swells 11.5% in April

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