The steady bull-run in the equity market has pushed up assets of mutual funds to new highs. In an interview with BusinessLine, Nimesh Shah, Managing Director, ICICI Prudential Asset Management Company, said retail investors should invest now to reap the benefit in three years when the market reflects the actions being taken by the Modi Government.

Excerpts:

What is your view on the market?

We look at equities and debt markets over a three- to five-year horizon. Currently, both markets offer good investment opportunity. A year back when the Sensex was at 19,000 I said it was a great opportunity and now when the Sensex is touching its peak also, I stand by my earlier statement. You may wonder why. I will explain.

At the outset I feel equity markets are now fairly valued. So, it is no longer a value-driven market were stocks are available cheap. We expect EPS (earnings per share) of all the Sensex companies to grow 20 per cent in next two fiscals. On the debt markets, we believe macro-economic fundamentals in India are well positioned. What used to be huge problems, such as current account deficit and high inflation, are no more issues.

We believe there is opportunity for investment growth in equity and value investing in debt. We see interest rates likely to going down 1.5 percentage points over the next two-three years.

Why are MFs launching close-ended equity funds?

We believe close-ended strategy works well for investors. Today, equity is not a six-month or one-year product. Close-ended scheme leave no options for investors to panic. They cannot sell their investments in a hurry even if there is a world event leading to the market going down 10 per cent. Unfortunately, retail investors do exactly that. So, they buy high and sell low. In the last one year, 10 per cent of our funds are close-ended, but 90 per cent of our sales are from existing funds that have good track record.

With no exit option, can close-ended funds ensure returns at the end of three years?

Though we do not commit on dividend payout, all our close-ended funds try to give it twice a year. We are also aware it is a three-year investment. We take a call on where the markets are six months before the maturity. Another thing what we try to do is pay regular dividends.

We came with a close-ended fund in October last year. It has already given two dividends. We keep on booking profits at opportune time and distribute dividends. We do not see close- ended funds as a closed thing for three years. It is the beginning of a long-standing relationship to invest in other open-ended schemes.

What is the reason for good flows into MFs from smaller cities?

It is the result of the brilliant move by SEBI to provide incentives to mutual funds collecting funds from beyond the top 15 cities. There is a lot of buoyancy, especially in the smaller cities. Distributors in these cities are very active. The biggest challenge for the mutual fund industry is to get enough distributors in smaller cities.

Suddenly, selling mutual funds has become a lucrative business in these places. While bigger cities have huge volumes, in smaller cities volumes are low but margins are good.

Do you expect foreign-owned funds to return to India?

Only serious players should come in. People sitting here and managing funds in India will survive. One thing that has come out very clearly in the last five-ten years is that you cannot be sitting in New York or Hong Kong and take calls on India. If you do that, you will never grow.

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