‘India now makes for a very credible investment avenue'

The current volatility in the markets should be utilised by investors to align their portfolios in line with their long-term investment plans, feels Mr Sanjay Sinha, CEO, L&T Mutual Fund. In an interview with Business Line , he also shares his views on FII investments, retail participation in markets, interest rates and inflation. Excerpts:

What are your views on retail participation in the markets?

While it has picked up, it still is much lower than what was seen in 2007.

The prosperity of the primary market ultimately flows into the secondary market. So, the gains you make in the primary market, whether it is notional or realised, ends up catalysing the secondary market. In the last one year, most primary issues disappointed in the first half and therefore they were detrimental to the large-scale retail participation in the first half. But some of the issues that came in the second half brought gains to a large number of investors. This trend is very useful in channelizing retail participation into the secondary markets.

But at the end of the day, the determinant of a thriving primary market is the attractive pricing of the issue. This should be kept in mind by every issuer. Not only should the capital market be seen as a means to raise capital, it should be viewed as a means to keep a large body of investors connected to your company and issue.

FII ownership in our markets is pegged at high teens now. How susceptible does that make our markets to FII selling, if any?

In the near-term, the markets will be susceptible to a large-scale selling by FIIs. Given the outstanding value of the FII investments in India, about Rs 11 lakh crore, selling will definitely have a large impact on the market. But what's more important is to look at what would trigger such a selling? Profit booking as such may motivate only a small segment of the FIIs. So, it will not be a strategy of the larger body of foreign investors that have come to India. India now makes for a very credible investment avenue in the global capital market space. This means most of the FII money is in for the long term. I don't think we might see very large scale selling.

In fact, the last time we saw a large amount of selling by the FIIs was when India took policy decisions, leading to global reactions. That was when we were experimenting with the Pokhran device and there was a global blacklisting of Indian companies. FIIs had sold significantly then. I don't foresee any such policy action in India that would invite a similar FII reaction.

What is your outlook of inflation and interest rates?

Global commodity prices including that of crude oil are beginning to perk up. While we can bring prices of agricultural commodities under control, we cannot do that with global commodities. So, the call on inflation would be very closely linked to what the outlook for crude oil prices will be. I believe that crude oil will be in a range, but below $100. So, inflation hopefully should begin to subside from February-March of 2011.

On interest rates, once liquidity in the system begins to ease by January, interest rates hopefully should not go up. While there is a need to control demand, there is also the need to keep the growth momentum alive. I think much of the activity on interest rates has already happened and don't see much of an upside on interest rates. They should stabilise at these levels.

What asset allocation would you recommend now?

Investors need to check if their broad asset allocation at any time is in line with their long-term financial goals. If that is in place, the short-term volatile movements in the markets shouldn't influence how one invests. We did an analysis to look at the performance of the stock market index over the last 22 years. We found that those who chose to invest for only one year at a time, made negative returns in 7 years. But if the investment horizon expanded to 5 years, such instances reduced to three. Beyond five, there were no instances of negative returns! So, when you choose to invest, the primary consideration should be check if your asset allocation matches with your long-term financial goal.

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