Allocate not more than 10-15 per cent of your equity assets to sector funds, says Sanjay Dongre, Executive Vice-President and Fund Manager at UTI Mutual Fund, in an email interaction with Business Line . Edited excerpts:

The market has been euphoric with the BJP sweeping the elections. Are expectations trumping fundamentals?

At 25,000-plus levels, the Sensex trades at 16 times its FY15 earnings, higher than the 10-year average valuation.

Hence, the upside in the market may be limited in the near term. With a stable and reformist government, FIIs are possibly expecting speedier economic recovery in FY15 and FY16. They have bought over $8 billion worth equities so far this calendar. At the moment, hopes and high expectations from the new Government are riding over the fundamentals.

Given the expectation of a reformist Budget, disappointment on that front may be the near-term risk for the market.

By when do you expect a growth revival?

India’s macro picture looks better with inflation off its high, stable and range-bound currency, and shrinking current account deficit (CAD). With the new Government expected to undertake fiscal consolidation over the next two years, this may enable the RBI to cut interest rates next calendar year.

Hence, visible recovery in growth may happen in FY16.

What would you like the new government to act on?

In the near-term, the market expectation is that the Government will kick-start stalled projects by removing constraints related to resources mining as well as environmental and forest clearances.

In the medium-term, the following measures, if implemented, may help the economy clock 7 per cent-plus growth.

The Government should expand cold storage and warehousing infrastructure and incentivise the food processing industry.

In the coal sector, State governments need to be made stakeholders while reforming Coal India and carrying out coal mine auctions. PSU banks need to be recapitalised to ensure availability of adequate credit to all segments of the economy.

GST needs to be introduced at the earliest to integrate state economies and boost growth. Rail reforms are needed and private sector participation should be allowed. FDI limit needs to be raised in sectors such as insurance and Defence.

Where are the pockets of opportunity in the market now from a two-to-three year time-frame?

From a two-to-three year perspective, NBFCs and cement look attractive. A benign rate regime may lower the cost of funds for NBFCs which augurs well for loan growth. In the cement sector, the demand-supply gap is expected to narrow considerably with lower supply additions. This bodes well for the pricing power of the sector.

Your outlook on the currency?

The rupee recovered from the August 2013 lows on the back of a shrinking CAD and declining inflation in the economy. It may hold on to the support levels of 57-58 to the dollar as the central bank may likely recoup part of the reserves it possibly lost while defending the currency last year. As the economy recovers, higher foreign inflow is expected to be neutralised by an increase in the CAD. The rupee is expected to stabilise in the 59-61 range.

From being a laggard earlier, UTI Infrastructure Fund has done very well in the past year. Do you expect the good run to continue? On a broader level, are sector/theme funds not too risky for retail investors?

Recovery in the economic growth is expected to be led by revival in the capex and investment cycle. As the pace of economic recovery gathers steam, the shift in fund flow from consumption-related sectors to investment-related sectors may continue. Hence, infrastructure as a theme is expected to do well in the next three-five years.

Sector/theme funds are volatile and do well in phases in the market. Hence, they are riskier for retail investors who are not well-versed with the sector/theme. So, it is prudent for retail investors to allocate not more than 10-15 per cent of their equity assets to sector/theme funds.

The UTI Masterplus Unit scheme is being merged with the UTI Leadership Equity fund from July 10. What is the rationale? How will the combined fund be different?

Both UTI MasterPlus and UTI Leadership fund are large-cap funds. Both have had similar sector weights and stock holdings. Hence, the portfolio of the combined fund would not be different from those of UTI Masterplus and UTI Leadership fund.

comment COMMENT NOW