UTI Mutual Fund is known for inculcating the mutual fund culture among India’s retail investors. Markets have reached dizzy heights over a short span of time putting small investors in a quandary. Many investors, who have burned their fingers in equity schemes of mutual funds, have turned cautious and are waiting for the new government to spell out its policy measures to mend the economy. With inflation remaining at an elevated level and corporates bogged by high debt, the economic recovery is expected to be treacherous. In an interaction with BusinessLine , Swati Kulkarni, Executive Vice-President, UTI Asset Management Company, is confident that better corporate earnings will support the current rally. Excerpts:

Is the current market rally for real as fundamentally nothing has changed in the economy?

I assume the rally is real if you are looking at a three-year horizon. In the short-term there may be volatility. There has never been a vertical ride in this market. Valuations have just moved from 13 times forward to 15.5 times. We have not seen valuations jump at the broader market level to such an extent what we typically see when the bull market matures.

When the bull market matures, earnings growth slows down. Now, we are talking about slowdown in earnings growth at the bottom of the market. As the economy picks up, we can look forward to better earnings growth. We were struggling to see earning growth of 10 per cent in the last two years. Going forward, we expect this to grow decisively to 15 per cent and if backed by a revival in the economy, then this is likely to remain in double digits for an extended period.

What happens if the earning growth does not materialise?

Then there could be some disappointment and correction may happen. But, typically when you are coming out of low earning space your estimates also comes with a caution. You would not have that euphoric estimation in numbers.

Is there space for retail investor at the current market valuation?

Retail investors should look at a diversified basket than timing a particular sector. If at all they want to be sector-specific, it should be limited to 5-10 per cent of their equity allocation. For an average investor, allocation to equity-related assets is very minimal. In the long run, equity investment can generate more wealth compared to other asset classes.

Is there redemption pressure on mutual fund?

The phase of redemption pressure has definitely slowed down. In fact, we have started seeing inflows post the election verdict. Earlier, when Nifty crosses 6,000 levels, we would see redemption and churning of portfolios with people moving from equity to short-term income funds. I am seeing the reversal now on the hope that the new Government could bring in changes to revive the economic growth.

What if Government policy does not support FII expectations?

We remain vulnerable to these risks, there is no doubt about it. This is simply because of the collective support to our markets from domestic institutions is scattered. If you talk about FIIs they are large players. Even if a single FII starts selling or has a change in view and finds some other destination or asset class attractive, there could be pressure. The impact of one large player moving out or reducing its position in India is felt because domestically we do not have strong players who can absorb the shock.

Why are foreign investors more bullish on India than domestic institutions?

If you talk about mutual funds particularly, we are guided by the inflows that we get. For instance, if we have redemptions, then we have to sell irrespective of whether we are bullish or bearish on the market. We have to create liquidity. Hopefully, that is not the situation now.

In the case of FIIs, they are looking at India in a relative perspective. Indian investors still compare fixed deposit returns with equity.

The moment they see markets are not giving matching returns they become jittery. On the other hand, FIIs are evolved investors and they back a country based on valuations and growth prospects.

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