“As operating leverage kicks in, profitability will move up. So, even in a fairly valued market, with PE remaining the same, you will get greater returns,” says Nimesh Shah, MD and CEO of ICICI Prudential Mutual Fund, explaining why this is a good time to invest in equities. Excerpts:

The Sumit Bose Committee has recommended that there should be no upfront commissions. What are your views on this?

My view has always been that a regulator should be concerned with what is charged to the customer and whether the customer is getting a fair deal.

After that, what an asset management company pays a distributor is between these parties and regulations need not come into that. This is happening because there is too much focus on mis-selling.

But the mutual fund industry is a very transparent industry. If we take ₹100 from you, you can see that the entire ₹100 has been invested; where it has been invested, at what price, etc.. You also know what I am charging you.

Beyond this, whether I am paying upfront or trail commissions to the distributor need not be regulated. There are less than 10,000 serious distributors in the country. So, we have to balance both — distribution should be a good business for the person taking it up and at the same time, customer should not get a raw deal.

The mutual fund industry has created a good balance between the two.

Net inflows into funds in recent times have been quite high, comparable to 2007. Is this sustainable?

In 2007-08, the sums in bank deposits were about ₹30 lakh crore and in equity mutual funds, ₹2 lakh crore. Today, monies invested in bank deposits is ₹90 lakh crore, but mutual fund investments are still at only ₹4 lakh crore. So, Indians are under-invested in equities.

Gold has not given returns last in the last two-three years and neither has real estate. Deposit rates are falling. Where will a person invest to beat inflation? So equity mutual fund flows will continue.

Currently, the consensus view on markets is that it is fairly valued. Where will the returns for equity investors come from?

Yes, we believe that stocks are fairly valued right now. But India will do well over a period of two-three years. I expect 2017-18 to be a great year. So, one should invest now to have a great 2018. The ROEs (return on equity) of companies are at all-time low.

This is because companies have not been fully utilising the capacities they have created. Over the next three years, when utilisation goes up, operating leverage will work, profitability and earnings will improve. So, even in a fairly valued market, with PE remaining the same, you will get greater returns.

On the debt side, do you expect further rate cuts?

The current account deficit is under control. The government is deploying excellent fiscal discipline. We have a central bank which talks about a very strong inflation control.

The RBI has made a good move by reducing interest rates by half a per cent. Ultimately, if inflation is 5 per cent, government should not be borrowing at 7.5 per cent. So, we believe interest rates will go down from here. One should take a one-year perspective.

You have value-focused funds such as ICICI Pru Value Discovery and ICICI Pru Dynamic. The latter has been an underperformer. Where is the value right now in the market?

Value can be in mid-cap or large-cap. Historically, the PE of mid-cap indices has always been cheaper than large-cap indices. But right now, it is higher.

So, at this point we feel people should invest in large-caps as value is in large-caps.

The Value Discovery fund has 65-70 per cent of its portfolio in large-caps.

Value style is also a contra style. Pru Dynamic has always done contra investments. It bought metals quite early. But what was cheap became cheaper and metals went further down. In the last one to two years, we stayed away from some stocks that seemed expensive. But these stocks became more expensive. The contra call has not worked till now. However, the fund has always done well over a three-year cycle. If you believe in mean reversion, you must invest in a fund that has not done well over the last year.

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