With an economic recovery likely to take six to nine months, it makes sense to bet on mid- and small-cap stocks through a closed-end fund, argues Gunwani. He spoke to Business Line on the sidelines of the launch of the Equity Savings Series. Excerpts:

ICICI MF has been active with new fund offers in recent times. What is the rationale?

There are three reasons for this. First, households are underinvested in equities. Probably 80-90 per cent of household investments are in real estate and gold. Given the stretched rental yields and affordability, equity now appears attractive relative to other asset classes.

In terms of valuations, if we remove some FMCG and large-cap IT stocks, the market is really cheap, the reason being that earnings are depressed right now. But if you normalise growth, then valuations are attractive for mid- and small-cap stocks and cyclicals. Third, on the macro front, while it is difficult to time the bottom, our sense is that we are close to the bottom.

The weakness in the rupee has given a stimulus to export as well as import substitution industry. So, that will drive the economy. Agriculture also seems to be doing fine, thanks to the monsoons. Irrespective of political alignment, there seems to be focus on development.

Can you not play the mid- and small-cap theme with your existing funds? Why new funds?

First of all, these stocks tend to have lower liquidity. The impact cost of buying and selling mid-cap stocks is also quite high. So, launching close-ended funds may help serve the purpose.

If the fund does well, we will pay out dividends and not hold on to the money. Close-ended funds also provide better flexibility to invest in small- and mid-caps by keeping the fund size at an optimal level.

If I have a ₹2,500-crore fund and want to buy 5 per cent in a stock, which has a market cap of ₹800 crore, it may be difficult. Also, close-ended funds make sense now when the return on equity (RoE) is low.

Though I don’t know if a recovery will happen in the next six-nine months I am more confident that it may happen over a three-year period.

What are the cyclical bets that could play out now?

One is automobiles. If you take a three-year view, auto sales may not continue to grow at the current slow pace.

Once interest rates ease, car sales will rebound. Even if crude oil moves by 5 per cent either way from here, and if the 50 paise per litre increase in selling price continues, in two years probably, the subsidy under-recovery for oil marketing companies will be zero.

Third, telecom companies, which were most fancied in 2008, witnessed a compression in RoEs due to competition. With the industry now in a consolidation phase, revenue per minute will increase.

How would you distinguish between your two ELSS schemes — R.I.G.H.T and Tax Plan?

Beyond the fact that R.I.G.H.T is close-ended, the way these two funds are run is different. R.I.G.H.T has a buy and hold strategy while Tax Plan tends to have a value bias. The churn might be less than 20 per cent in the former, but it has done well. It’s a good example to show that close-ended funds work.

Given that the Asian economies are not doing well, what is your strategy for the Indo-Asia fund?

From 2012 to mid-2013, our thought process was that the current account deficit was high and India is consuming more than what it is producing. So, we kept a fair amount of Asian equities in this fund as protection from (a fall in) the Indian currency.

But going forward, we are planning to move the money from Asia into the Indian market. ₹61 to a dollar is a fair value for the currency. So, we want to make it an India focussed flexi-cap fund now.

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