The next one year could be hard to predict, but there is value in the market from a three-year perspective, says Nimesh Shah, Managing Director & CEO, ICICI Prudential Mutual Fund. Excerpts from an interview:

Are you still able to find value picks in the market?

In October 2013, we had emphatically given the call to invest in equity. At that time every parameter was bad — industrial production, fiscal deficit and GDP growth were at their worst levels. We believed that was the best time to buy as market tends to over-react to these negative indicators.

Because of that call, we have a large set of happy customers. Let us look at the current market. The PE ratios that were in the range of four to seven have now moved to 15 to 17 times. Market is neither cheap nor expensive now. We are positive on the prospects of the country as a whole and this will reflect in the earnings of 2016-17 and 2017-18.

How will companies earn more?

There are many companies that have underutilised capacities. While the PE ratios are close to their long-term averages, the ROEs are below their average for the last 10 years. This is because companies are unable to utilise their existing capacities due to regulatory, environmental, demand or supply constraints.

Even if the Modi Government is not able to wield a magic wand and bring about major changes, some changes on the ground will make a big difference. In the last three years, money was made by buying cheap stocks with good management. In the next three years, money will be made in stocks that can improve their ROEs.

Which are the sectors where you see lower ROEs and the potential to appreciate?

We have created the ICICI Target Return Fund and we have focused the fund only on stocks that can deliver over the next three years. We have only two to three sectors in that fund.

We believe that cyclicals will do well and we also believe that the dollar will appreciate over the next three years.

So, 25 per cent of the fund is in technology stocks, 30 per cent in banks and financial services and others are the industrials.

The recent RBI circular on rescheduling infrastructure loans is going to be a game-changer for banks with large NPAs. A seven-year loan given to a power plant can turn into an NPA but a 20-year loan cannot.

What is the likely impact on equity flows due to falling interest rates?

I believe that financial savings are set to increase this year. It is up to us to make the most of this opportunity. As interest rates move lower, returns on fixed deposits will move lower, so investors will move towards equity. In 2008, banks had FDs to the tune of ₹30 lakh crore, equity MFs had assets of ₹2 lakh crore. Now bank FDs have ₹85 lakh crore, equity MFs have just ₹3 lakh crore. So, our business has to double in the next three years.

Last year, the IPO market was dull, but NFOs were many. Do you think new investors now prefer the MF route?

The shift has already happened. In the last six months, mutual funds have invested more in the equity markets than FIIs — between May and November last year. The number is also higher than the retail coming directly into the equity market. Thanks to regulatory changes at just 2 to 2-1/2 per cent cost, investors are able to invest in mutual funds that are very transparent and pure products.

What is your view on SEBI wanting to clamp down on upfront commissions?

The regulator should worry whether the customer is getting charged right according to the service he is getting. We all agree that the customer is not overcharged in a mutual fund.

Coming to the question of how much a distributor is paid, it should be left to the manufacturer and the distributor. If I do something that is harmful to the customer, I can be punished. MFs are such pure products that it cannot be mis-sold.

If a distributor is mis-selling then he will soon go out of business. Do you think customers will stay with us if customers have negative experience with us?

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