How to read a mutual fund factsheet

Most asset management companies usually publish monthly reports (also called fact sheets) that contain critical information related to the portfolios, at times a roundup on debt and equity markets from the fund manager and performance details of the schemes managed by the AMC.

The idea is to help investors (both existing and potential) to track the performance of the mutual fund schemes so as to take an informed decision. To that end, factsheets serve as an investor’s guide.

To be sure, factsheets were always meant to be the investor’s guide. However, in many cases, they are not upto the mark leaving much scope for improvement and even standardisation. We highlight the most critical reference points for the uninformed investor based on data that is more or less standardised across AMCs.

For ease of reference, we have divided the article in two parts, the first part discusses how to assess the equity fund factsheet and the second part discusses the debt fund factsheet.

A) Equity fund factsheets

Stock allocation

Thankfully, factsheets of most AMCs highlight the portfolio composition well enough, although there is scope for standardisation. For an investor who wants to invest in equity funds, the factsheet can offer some critical insight into the fund management style/approach.

To begin with, consider the top 10 stocks in the portfolio to determine the level of diversification. In our view, a diversified equity fund should have no more than 40 per cent of net assets in the top 10 stocks. This should help the fund negotiate volatility more effectively than its concentrated peers. For instance, Sundaram BNP Paribas Growth Fund is a fund we like for its disciplined investment approach (no more than 5 per cent of assets in a single stock) that ensures that its top 10 stocks are well-diversified.

Sometimes, a fund could be well-diversified across the top 10 stocks, but investments in a single stock could be so high so as to offset an otherwise diversified portfolio. A case in point is HDFC Capital Builder (a well-managed value fund), which was done in during the market crash in May last year due to unduly high investments in a single stock (Hindustan Zinc).

Also look at the fund’s portfolio over several months to get a sense of the consistency in the fund manager’s stock picks. Too much churn in the stock picks (new names every other month) indicates that the fund manager could be punting rather than investing, thereby adding to the trading cost, which ultimately eats into the returns.

Sectoral allocation

Just as you evaluate the stock allocation, it is important to consider the sectoral allocation of the equity fund. Diversified equity funds should be well-diversified across stocks and sectors. A fund could be well-diversified across stocks, but may pay the price for not diversifying well enough across sectors.

For instance, Sundaram Growth Fund, a fund we admire for superior diversification across stocks, learnt the hard way during the last market slide that diversification across stocks is as important as diversification across sectors. The fund had unduly high investments in infrastructure-related sectors.

The crash proved particularly harsh for the fund, as it had failed to diversify across other sectors. So like stocks, being diversified across sectors is just as important; unfortunately, it often takes a sharp dip in the stock markets to highlight the importance.

However, funds like HSBC Equity Fund, which pursue the top down investment approach, have concentrated sectoral allocations, which suit their investment style. These funds need to be evaluated differently from funds that pursue the bottom up investment style.

While calculating the sectoral allocation, the investor must combine like-natured sectors to understand the level of sectoral diversification. For instance, most equity funds list Auto and Ancillaries sectors distinctly; given the similar nature of these sectors, their allocation must be combined.

Another problem relates to the categorisation of companies across sectors. Different equity funds categorise the same company across different sectors. There is no standardisation. While AMFI (Association of Mutual Funds of India) has introduced certain standardisation processes in this regard, the same is not adhered to across the industry.

Asset allocation

Stocks and sectors apart, there is another detail that must catch your attention and that is the asset allocation. The asset allocation table tells you how the fund’s net assets are diversified across stocks, current assets/cash. An equity fund’s allocation to cash should be noted.

Among other reasons, this could be because the fund manager is not comfortable with market levels at that point in time. This fact can be established easily by browsing through the previous month’s factsheets. If the fund manager has been in cash for some time, it means he does not find enough stock-picking opportunities at existing levels.

Being in cash could work in the fund manager’s favour if the market crashes, like it did for Sundaram BNP Paribas Select Midcap May 2006. But a higher cash allocation works against the fund during a rising market, when being fully invested is what counts. Sundaram BNP Paribas Select Midcap has also witnessed this scenario, which explains its relative underperformance over the last few months.

Other data points

In addition to the points listed above, there are some data points that must be marked by the investor.

Portfolio Turnover Ratio

Put simply, this ratio tells the investor how much churn the portfolio has witnessed. This ratio is calculated based on the number of shares bought and sold by the equity fund over the review period. A high Turnover Ratio (vis-�-vis peers or other equity funds from the same fund house) indicates that the portfolio has seen above-average churn.

A high churn by itself does not necessarily imply that the fund is good or bad, however, it must be in line with the fund’s investment philosophy. A growth fund can have a high turnover ratio (although that’s not necessarily a good thing as it adds to the trading costs and therefore eats into your returns).

However, a value fund should typically have a lower churn as the fund manager would usually be investing in the stocks over the long term.

Important as it is, the Portfolio Turnover Ratio is yet to be given due importance by the fund houses (maybe they are afraid of ‘exposing’ their fund managers). How else, do you explain the fact that fund houses either don’t reveal the Portfolio Turnover Ratios or when they do reveal them, it is not standardised thereby robbing investors of the opportunity to compare them across fund houses.

Expense Ratio

This ratio underscores how expensive your equity fund really is. A high Expense Ratio (regulations cap this at 2.50% for equity and debt funds) indicates that your mutual fund investment is expensive. As per regulations, fund management expenses, which form the largest chunk of the expense ratio, must decline with a rise in Net Assets. So larger equity have more scope to reduce their Expense Ratios.

Again, fund houses are not very enthusiastic about sharing this important detail with investors. However, they do declare this ratio every 6 months, which is only because regulations demand that they do so.

Fund manager information

It always helps to know who is managing your fund. Not that we have any particular fund manager in mind, rather we recommend that investors do not get infatuated by any fund manager in particular and look for investment teams instead. Over the long-term, it pays to have your money managed by a group of fund managers, rather than one star fund manager, who could quit the fund house any time and take the performance with him.

So keep an eye on the fund manager details, typically, there should not be many external changes in the fund management team. When the same names manage your money, over a period of time there is stability in the fund management process. Thankfully for investors, majority of the fund houses do provide the fund manager details.

B) Debt Fund Factsheets

Like their equity fund counterparts, debt fund factsheets offer enough insight to the debt fund investor. For this, investors have to keep an eye on at least three aspects:

Average Maturity

For debt fund investors, this is perhaps the most significant detail to look out for in a debt fund factsheet. Since the Average Maturity of a portfolio for a particular month in isolation does not tell the investor much, he must go back several months to see how the Average Maturity of the portfolio has moved in order to understand the fund manager’s view on debt markets.

To give investors an idea - if the fund manager has been maintaining a higher Average Maturity for some time, it means that he expects interest rates to fall over time. On the other hand, if the Average Maturity of the portfolio is lower, it means that the fund manager is cautious about interest rates. Ideally, investors must read up on peer factsheets to understand the consensus on interest rates and if your fund manager has a differing view, you must try to understand why.

Credit Rating Profile

Debt funds invest in securities with varying credit ratings. In the Indian context, most debt funds do not take on undue credit risk - i.e. they invest primarily in securities that are highly rated. Investors should mark the credit rating profile of the debt fund. A large chunk in AAA/Sovereign paper (which is the highest rating) implies that the fund is taking lower credit risk. On the other hand, a higher allocation to AA+/AA paper underlines the fact that the fund manager is taking credit risk.

Asset Allocation

Like with equity funds, debt fund investors must consider the asset allocation of the fund under review. This should help him understand the investment approach of the fund manager and the risk he is taking. Debt funds invest mainly in corporate bonds and government securities, both of which carry varying risk. Investors must make a note of the assets invested across both these segments.

Then there are floating rate funds that invest predominantly in floating rate paper; in practice however, many are predominantly invested in cash/current assets for lack of adequate floating rate instruments.

Likewise, monthly income plans invest a portion of assets in equities (the maximum limit on which is predetermined), investors must check the equity allocation over the last several months to understand the kind of risk the fund manager is taking (on the equity side) and whether he is adhering to the ceiling on equity investments.

Taurus mutual Fund has appointed Prasanna Pathak as equity fund manager

Taurus MF appoints new equity fund manager

Taurus mutual Fund has appointed Prasanna Pathak as equity fund manager, as part of its expansion plan to strengthen its presence in the domestic mutual funds industry. 
Prasanna Pathak is an B.Tech (Chemical Engg.) from LIT, Nagpur and an MBA from S.P. Jain Institute of Management, Mumbai. He brings with him over 6 years of experience. He began his career with Hindustan Lever Limited and was posted in Bangalore for two years. He joined UTI AMC in May 2004 as an Asst. Fund Manager -Fixed Income. Subsequently he moved into Equity Research and then into Fund Management -Equities as an Asst. Fund Manager. 

He was involved in managing a total corpus of around Rs. 2000 crore including Funds like UTI Index Select Fund, UTI Service Sector Fund, UTI Banking Fund, UTI Energy Sector Fund & UTI Master Growth Fund.

Bank of America sees growth opportunities in India

Bank of America on Monday said that its 50-billion dollar acquisition of Merrill Lynch would provide it with significant growth opportunities in India. 

In an investor presentation webcast to discuss the deal, Bank of America Chairman and CEO Ken Lewis and Merrill Lynch chief John Thian said Merrill Lynch has been focusing on growth in India and the deal would result in “significant growth opportunities” in wealth management and investments businesses in the country.

Merrill Lynch has been the market leader in India with full local capabilities and there has been a significant expansion since increasing stake in DSP Merrill Lynch, the Indian entity, to 90 per cent, they said.

While Merrill Lynch has a notable presence in India, particularly in mutual fund and investment banking segments, BofA has also invested in the country as an emerging market. Bank of America has five branches in India — Mumbai, Delhi, Kolkata, Chennai and Bangalore.

Bank of America has said its Indian banking operations have consistently delivering superior returns year after year. Its revenue in its Indian operations rose 30 per cent to Rs 861.7 crore and profit after tax rose 56 per cent to Rs 305.2 crore for the year ended 31st March, 2008.

In October 2007, Bank of America made a capital injection of Rs 328.2 crore into its India operations, boosting the bank’s capital base and strengthening its capital adequacy ratio.

It also owns a subsidiary in India called Bank of America Securities India Pvt Ltd, which is engaged in underwriting, dealing and trading of corporate fixed income securities and related capital market activities.

On an aggregate basis, the bank’s India business reported a total revenue of Rs 889.9 crore in year ended March, an increase of 30 per cent over the previous year, and a net profit of Rs 323.1 crore at a growth rate of 58 per cent.

During his India visit earlier in May this year, Merrill Lynch CEO John Thain had said that India was the most attractive place for investments. 

“When I look around the world where there are great growth opportunities, no place is better than India right now,” he had said.

Globally, the deal is expected to result into thousands of job cuts, but the industry experts said that layoffs could be minimal in India as the two entities are mostly active in separate businesses in the country.

While, Bank of America’s mainstay is banking business and corporate fixed income securities segment, that for Merrill Lynch include mutual fund, equity market investment banking and wealth management businesses.

DSP Merrill Lynch is among India’s leading investment banking and wealth management companies. 

Kothari family- promoted DSP and Merrill Lynch have had a joint venture relationship since 1995 and in late 2005 Merrill Lynch announced raising its stake from 40 per cent to 90 per cent.

However, DSPML Fund Managers, a wholly-owned asset management arm of DSP Merrill Lynch, had continued to be operated as a venture jointly owned by DSP Merrill Lynch with 40 per cent and Kothari and related entities with 60 per cent.

Earlier this year, DSP-ML decided to rename the mutual fund entity as DSP BlackRock MF after BlackRock Inc, the top global asset management firm, acquired a 40 per cent stake in it as part of a global deal with Merrill Lynch.

Sanjay Sinha Appointed as the Chief Executive Officer of DBS Cholamandalam AMC

DBS Cholamandalam Asset Management Limited (DCAM) today announced that Sanjay Sinha has been appointed as the new CEO of the company.

Sanjay Sinha, 43, was the Chief Investment Officer of SBI Funds Management managing almost Rs 35,000 cr of assets in debt, equity, money-market and off-shore funds. He was earlier with UTI as Vice President and senior fund manager managing nine equity schemes. Sanjay holds an Honors degree in Economics and is a Post Graduate from IIM Kolkata.

Over a career spanning over nineteen years, all of it in Mutual Funds, Sanjay has actively managed every aspect of the business – from product design, sales and marketing, investor servicing to managing a wide variety of funds. One or more of the funds he managed have won performance awards every year since 2003, with as many as 13 awards in 2007 itself.

Welcoming him, Mr M A Alagappan, Chairman of Cholamandalam DBS and of the Murugappa Corporate Board, said: "Sanjay brings with him an unparalleled track record in the industry. He joins us at a time when both the partners, Murugappa Group and DBS, are keen to quickly re-establish the asset management business in a path of sustained growth. Sanjay's in-depth experience and widely recognized capabilities will be of immense value as he leads our efforts to achieve this." 

Sanjay Sinha said: "After almost two decades in some of India's largest organizations, I have always wanted to take on the challenge of building an institution. DBS Cholamandalam has provided me an ideal opportunity to do just that. I am delighted and excited at this prospect". He added, "The mutual fund industry is extremely competitive. I hope to be able to leverage the existing strengths of the company while rapidly scaling up new competencies required to significantly add value to investors."

DBS Cholamandalam Asset Management Limited

DBS Cholamandalam Asset Management Limited (DCAM), a subsidiary of Cholamandalam DBS Finance Limited, a joint venture between the Murugappa Group and DBS of Singapore, is the investment Manager of DBS Chola Mutual Fund. Known for its prudent and disciplined investment philosophy, DCAM offers products across asset classes in equity, debt and money market. Within each asset class, the funds adhere to distinct investment styles, offering investors options to build a portfolio that best suits their goals and objectives.

Cholamandalam DBS Finance Limited

Cholamandalam DBS Finance Ltd., a joint venture between the Murugappa Group and DBS of Singapore. The Company, along with its subsidiaries and affiliates offers individual and institutional customers a range of financial services - personal loan, vehicle finance, home equity loan, capital market finance, corporate finance, mutual funds, securities broking and distribution of investment and insurance products. 

DBS

Headquartered in Singapore, DBS and is one of the largest financial services group in Asia. The largest bank in Singapore and the fifth largest banking group in Hong Kong as measured by assets, DBS has leading positions in consumer banking, treasury and markets, asset management, securities brokerage, equity and debt fund raising. Beyond the anchor markets of Singapore and Hong Kong, DBS serves corporate, institutional and retail customers through its operations in Thailand, Malaysia, Indonesia, India and The Philippines. In China, the Bank has branches and representative offices in Shanghai, Beijing, Guangzhou, Shenzhen, Fuzhou, Tianjin, Dongguan and Hangzhou. The Bank's credit ratings are one of the highest among banks competing in the Asia-Pacific region, and the highest among banks in Singapore.

About the Murugappa Group

Headquartered in Chennai, the Rs.9582 Crore (USD 2.4 billion) Murugappa Group is India’s leading business conglomerate. Market leaders in diverse areas of business including Engineering, Abrasives, Finance, General Insurance, Cycles, Sugar, Farm Inputs, Fertilizers, Plantations, Bio-products and Nutraceuticals, its 29 limited companies have manufacturing facilities spread across 13 states in India. The organisation fosters an environment of professionalism and has a workforce of over 32,000 employees. The Group which has forged strong joint venture alliances with leading international companies like DBS Bank, Mitsui Sumitomo, Cargill, China Engineering & Expoloration Bureau and Groupe Chimique Tunisien, has consolidated its status as one of the fastest growing diversified business houses in India.

Mohit Sachdev appointed as Chief Marketing Officer of DBS Chola Amc

DBS Cholamandalam Asset Management Limited (DCAM) announced that Mohit Sachdev has joined the company as Chief Marketing Officer.

Mohit Sachdev, 42, is a B.Tech from IIT Delhi and PGDBM from IIM Bangalore. He was earlier with UTI as President looking after Institutional Business. In his nineteen years of experience in financial services, he has dealt closely with changing debt and equity markets, using his knowledge of markets to guide customers on the right approach to their investments.

Welcoming him on board Mr. N Srinivasan, Director Finance on the Murugappa Corporate Board and Lead Director for the Asset Management Business said, "The AMC has aggressive plans for growth. We are delighted to have Mohit with us to lead the sales and marketing initiatives. His vast experience and insights of the mutual fund markets will be an asset to the company".

Commenting on his appointment Mr. Mohit Sachdev said, "I am very excited by this opportunity to be part of the leadership team that will take DBS Chola Mutual Fund to a higher level. The Murugappa Group and DBS Bank are solid institutions and I eagerly look forward to this challenging assignment".

Trusts charities organisations now turning to Mutual funds

Mutual fund is no more a revenue generator for the likes of big, budding or prospective investors only, even the well-known charitable institutions and organisations are taking the route to earn handsome returns in a short span of time. According to some reliable sources, it has been observed recently that investing in mutual funds is slowly becoming popular among these organisations and as the time progresses it is expected that more and more organisations will join the herd. 

These organisations which consist of both religious and non-religious trusts are investing a majority of the capital with them in the long-term funds in equity schemes. Several eminent names in the field of performing social works such as the Gujarat Cancer Society, Charities Aid Foundation of India, Ram Janambhoomi Nyas, Shwetambar Trust, Missionaries of Charity, International Centre for Entrepreneurship, Hindustan Charity Trust, Birla Kalyan Nidhi Trust and many more have joined the league of investing into the mutual funds. 

This augers well for the mutual fund industry, as in the near future, more funds are expected to flow into this business. A distribution head of a fund house said, “Many charities have surplus funds not needed to fund their immediate charitable activities; often, the trustees invest some or all of this surplus in order to generate extra income to fund future activities.” He also claimed that he has ample trust-oriented mutual fund schemes with him, which is clearly a good omen for the mutual fund industry. 

Interestingly, the Indian Trust Laws have granted the right to religious organisations, Wakf boards, registered societies and even the charitable trust to invest into mutual fund schemes. Investment from these organisations is a good news for all the mutual fund players, as it will ultimately help them on the promotional front, and will also help them in reaching out to people in the remote corners of the country. 

Jayshankar Maharaj of the Ramakrishna Mission also voiced his opinion in favour of the investment in the mutual funds, he said, “ Almost all major organisations are investing in mutual funds now. These boards generally take a very conservative approach as they are dealing with public money. Many trust boards invest in mutual funds which offer systematic investment plans.” 

Rajiv Bajaj, Managing Director, Bajaj Capital explained the reason behind this emerging trend, he said, “ The trend of investing into mutual funds is more of a natural progression. Even though these are non-profit organisations, trust boards always show inclination to optimise their portfolio yields. By investing in mutual funds, these boards crave for simple 12-15% annualised returns. The investment profile of charity organisations is very similar to pension funds.”

Kotak Mahindra Mutual Fund Enters into a Distribution Tie-up with Andhra Bank

Kotak Mahindra Asset Management Company, one of India’s leading mutual fund houses, today entered into a distribution tie-up with Andhra Bank. Under the agreement, Andhra Bank will offer the entire bouquet of Kotak Mutual Fund products from the bank’s 1386 branches. Sandesh Kirkire, Chief Executive Officer, Kotak Mahindra AMC and Rakesh Sethi, General Manager, Marketing, Andhra Bank signed the MOU.

On the occasion, Sandesh Kirkire, Chief Executive Officer, Kotak Mahindra Asset Management Company said, “The banking channel is one of the best platforms to reach out to retail investors. Offering advice on mutual fund investments is an extension of the value added services that are offered by banks. As experts in the field of wealth creation in India, our tie up with Andhra Bank will reinforce our commitment to expand retail participation. With this tie-up customers will gain easy access to the various schemes of Kotak Mahindra AMC at the branches where they do their banking transactions.”

About Kotak Mahindra Mutual Fund www.kotakmutual.com

Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned subsidiary of KMBL, is the Asset Manager for Kotak Mahindra Mutual Fund (KMMF). KMAMC started operations in December 1998 and has over 10 Lac investors in various schemes. KMMF offers schemes catering to investors with varying risk - return profiles and was the first fund house in the country to launch a dedicated gilt scheme investing only in government securities.

Kotak Mahindra Mutual Fund provides investors with smart financial products, which are aimed at enhancing customers' wealth, along with services that make the investing process easier. The company has a history of innovative products and services behind it, and has led the way for the industry on many counts.

Set up in 1998, Kotak Mutual Fund currently manages assets in excess of Rs. 19700 crores contributed by over 10.24 lakh investors (as on 31st August, 2008).

Statutory: Kotak Mahindra Mutual Fund is a Trust (Indian Trusts Act, 1882). Investment Manager: Kotak Mahindra Asset Management Company Ltd. Sponsor: Kotak Mahindra Bank Ltd. (liability Rs. NIL). Trustee: Kotak Mahindra Trustee Company Ltd.

Before investing, please read the Offer Document carefully.

About Andhra Bank: 

Andhra bank is established in 1923 by Dr. Bogarju Pattabhi Seetharamaiah, a patriot, freedom fighter and a Gandhian at Masulipatam. 

The bank was nationalized in 1981. Now the bank has 1386 branches spread over 22 States and 2 Union territories. The total business of the bank as on 31.03.2008 is Rs. 83,993 crores (Deposits Rs.49,437 crores and Rs.34,557 crores).

Market to see deep and large correction :: Rakesh Junjunwala (POSTED IN APRIL)

Below mention article posted on this blog in the month of ARPIL 2008

The question bothering the markets still remains - is there more pain left and what is the road ahead? To find out answers to these questions, CNBC-TV18’s Stocks Editor, Udayan Mukherjee caught up with ace investor and market expert Rakesh Jhunjhunwala in a special series called ‘Hunt for the Bottom’.


Jhunjhunwala feels that the markets have seen a bull-run since April 2003 and one cannot have a bull market without corrections. The corrections would be testing the investors’ patience and their sheer belief in the markets, he said. ”All the corrections we have had in the last four years have had been deep but they have not been deep time-wise. I think the real patience and the real belief in the equity and in the market comes when the market tests you time-wise. So I think this is going to be one of the deepest and the longest corrections that we are going to have, in what I believe is going to be a very long bull market,” Jhunjhunwala said.

Excerpts from Udayan Mukherjee’s conversation with Rakesh Jhujhunwala:



Q: Is the worst over, have we seen most of the pain or do you fear that there could be much more pain this time around?

A: We have not four but four-and-a half-years of bull market, which started in April 2003. Whatever be the quality and depth in the length of the bull market, you are not going to have a bull market without corrections, which are not going to test our patience and sheer belief in the market. All the corrections we have had in the last four years have been deep. They have not been deep timewise. The real patience and belief in equity markets comes when the market tests you timewise. This is going to be one of the deepest and longest corrections that we are going to have. However, this is going to be a very long bull market.

Q: In the middle of this phase, you expect to see some rallies which will get sold into as well?

A: Yes. You will surely see rallies and we are in the midst of one. Suppose the markets doesn’t exceed and the index doesn’t go 21,000 and Nifty doesn’t go above 6,200 for the next 18 months, I as an investors won’t bother it at all. I would happily rest with the kind of gain we have had for the last four-and-a half-years.

Q: It could be an 18 months rest you think?

A: Why not.

Q: Six quarters of market not going above the old high?

A: Why not.

Q: Is it a possibility or a probability according to you?

A: It’s both.

Q: You think it’s a highly likely event?

A: I believe in the long-term story. I am going to profit as an equity investor. As an investor, I don’t see a greater rate of return for my capital at any place other than the equity market. I watch the market everyday but I won’t be surprised. I am prepared for it.

Q: But you look at the screen very carefully as well and trade a bit? Is the screen reflecting any strength over the last few days?

A: A good part of the market has already bottomed. It may take time for the market to gain. In the midcap space, a lot of stocks have bottomed. But the price movement tells me that as of now, not much of the market is going to renew those.

Q: Which sectors are still vulnerable to downside? Some sectors had seen massive excesses, but stocks have also fallen 40-50-60%. Do you think enough correction has happened in those sectors or pockets or they may unwind further?

A: That’s a very difficult call to take. We have to play it scrip to scrip. It is difficult to take it sector to sector.

Q: You had concerns about spaces like real estate etc. Do you think they have corrected enough?

A: I have been a real estate stock bear and have been wrong earlier. I still feel there is space to go there.

Q: Any other clear space where lots of excesses have happened?

A: In the infrastructure sector, there is lot of excess valuations. Stocks will take time. It will take time for the excesses to wear off.

Q: You have been a big bull of that space and have had big holdings like Praj, and Punj Lloyd? Do you think there were excesses at the top in those kinds of areas as well?

A: Suddenly the valuations were quite high.

Q: But have they corrected enough after this big fall?

A: They have corrected. But for them to really gain their old highs it will take time.

Q: India has been one of the biggest underperformers in the last three months. Do you think there are local problems as well, which we need to content with over the next one year?

A: The way to tackle inflation is to increase supply. To keep interest rate high in the face of low interest rate worldwide, is a local problem. A friend of mine told me sometime back that the true bottom of this market will be made the day the election is announced, but that has been the history of our markets.

Q: Does politics present a threat to this market?

A: We have seen the worst of whatever the threat could be. I don’t think they are going to impose price controls anywhere. Also, India has grown a lot without the politicians. So, I am not afraid if Mayawati becomes Prime Minister, but I hope she will not. I think politics has done no good. If god were to grant me one wish, I would ask him to let anybody be the Prime Minister of this country, but let not that government be supported by Communists, because if you were to listen to the Communists we were to get everything free and don’t have to work for anything.

Q: Does government policy worry you? We have seen quite a bit of price control etc in the last one-month? Does it worry you significantly?

A: Not at all, because we have been hearing all this for so many years but India has trudged along. Do you think anything has changed in the last 12 years?

Q: What about steel? If I remember correctly, you bought some steel stocks earlier, didn’t you own Tata Steel?

A: Yes. I bought some steel stocks even lately. They are not going to impose any price controls. SAIL and Tata Steel are placed very well as far as government rules are concerned. If steel prices go up, they benefit because they have captive commodities.

Q: What is essentially different about what is going on now in the market and what you saw in 2001 and 1992?

A: Valuations in these times never got to 1992 levels. In 1992, we were trading at 65 times earnings, 2001 at 35-32 times earnings, and this year we peaked at 21 times maybe 2009 earnings.

Q: In some pockets like infrastructure etc we did go to 30-40 kind of P/E multiples?

A: Yes, maybe but that was not a very large part of the market. After all, the largest part of the market is the Sensex and Nifty. The bull market that started in 2003 cannot end at less than 30-35 earnings or at least 25-30 times for the index.

Q: Let me paint a bearish scenario. The bears say that interest rates go up even from here, which may not be justified. But in our country sometimes we do things which are not justified. GDP growth slows to sub-7%, earnings growth slows to 10-12%, could we have then in that kind of situation a compressed one-two year kind of a bear phase? Is that a likely scenario or even a possible scenario in your eyes? 


A: 4,100-4,200 which corresponds to 12,500-13,000 on the Index is a level which we are not going to penetrate on the downward side very easily. 5,300-5,400 upside on the Nifty is a level that we will not penetrate easily. So, we could be in a 4,200 range. The range could be 4,500-5,300 instead of 4,200-5,300. We could pass a year or 18 months.



Q: Is it a good time for investors to buy stocks or do you think they won’t be rewarded in the next one-year or so?

A: I don’t think we as investors should be worried about what rewards we can get in a year. I have made the biggest money by understanding that I get the reward within a time period which is reasonable and one-year is never reasonable. If one gets good stocks at valuations which one thinks are good and feel the ultimate value of the stock will be far higher, one should buy it.

Q: How much damage has been done this time around because in our country because a very narrow section of the population invest in stocks?

A: Everybody’s portfolio is damaged, but my portfolio doubled in one-year. You went from 100-200 then, came back to 140-150 and right now are at 130-135. The increase was very severe and the fall was equally severe. I don’t think the damage has take place with those Charlie’s who came to make a fast buck. The serous investors who invested through the last four-five years have been getting very good returns.

Q: Do you think they will hold the faith, which has been seen so far in the mutual fund portfolio with no major redemptions? Do you think this whole phase will pass without significant mutual fund redemptions?

A: Why do you think these redemptions are not taking place? It’s not an act of defiance according to me. It is because may be it is supports. The amount of money that has to come to India for investing locally is far greater than what we have had. So, some people are withdrawing but every other money is going up. Prosperity is also going up. People who are running businesses are feeling the prosperity. So, may be the redemptions may not take place. It could also be that the kind of money which has come is good genuine money and not some short-term scam money.

Q: Having seen five-years of bull run and then a sharp three-month correction, do you think it is time to re-orient your investment strategy somewhat because a few things have fallen off the cliff? - Is it time to change your horses?

A: I have followed one investment strategy all my life. Good investing gives you good returns. It depends on your investment strategy. My investment methodology and strategies don’t change as markets keep changing. If I have a good stock, then it is going to give returns. One thing which supports the market is the bodyweight of solid liquidity. With these kind of high oil prices, where is all this surplus money with West Asian countries going to go?

Q: But you trade as well, do you sense that different sectors are coming back? IT has had a nice rally after a long time, They were two years out in the cold. Is it possible that some of these losers of the last couple of years could stage a comeback?

A: I am not personally so bullish on IT.

Q: You have not been for a while?

A: Yes, because they are a mature industry, all institutions own them. I think growth is going to be limited there. There are uncertainties in the principal markets. Although I have true respect and true regard for the Infosys management, I think meeting their guidance is going to be a challenge.

Q: Do you think there is a risk out there?

A: I think there is a challenge, because conditions in the US are going to get worse by the day. They are saying they expect the second quarter in the US to be better .

Q: Which is when you think the problems will start dropping in?

A: I think there will be three stages of the problem in America. First is the realisation of the subprime problem. Second, the economy will slowdown as a result. I think defaults would creep into prime housing, into credit cards and auto loans and maybe commercial real estate. I think that will be the second stage. The third stage is going to be a depression.

Q: Have you ever bought an FMCG stock in your life?

A: Yes, I have.

Q: Not Tata Tea?

A: No, not Tata Tea. I have another FMCG stock in which I own more than 5%.

Q: So, a largecap FMCG stock?

A: I won’t say largecap but fairly good company called Agro Tech Foods.

Q: But none of the ones we know like Colgate, Dabur, Marico, and Lever. You have never bought them in your life?

A: I may have bought some stocks like Colgate and sold it. I bought some shares in Lever in 2004 and sold it in 2005. I have made good money there.

Q: Have you ever been a big pharmaceutical investor?

A: I have a large investment in Lupin and made good money in Matrix. I made some small investments in Ranbaxy.

Q: Do you subscribe to the theory that capital goods or power is a sector, which was such a big leader, is on the wane and will not lead to the next rally?

A: Wane is about P/Es. Pharma P/Es are set to go up. That’s one sector which will not dip if we get a prolonged correction. If you look at some of the P/E e ratios of pharma companies, they are certainly attractive. Everybody has been so ebullient about capital goods and that’s why P/E’s are high. It will take time for earnings to catch up. 

Q: What are your thoughts on oil and gas as a space? You just spoke about crude; do you think there is an oil and gas play in India from a stock market perspective?

A: Well I would Reliance is a big oil and gas play. There could be some interesting plays in the smallcaps and the midcaps.

Q: Exploration?

A: Yes, exploration.

Q: You were once a bull on Indian Oil Corporation. You lost your hope in them?

A: I will never buy them, I promise. Wherever government is involved I am going to be very careful.

Q: That's surprising coming from you because you made a lot of money from PSU companies like BEML and Bharat Electronics?

A: But at what valuations? I started buying Bharat Electronics at Rs 32, BEML at Rs 30. Also what I realized and why I sold this is that for companies to really gain at these valuations, one has got have that plus-plus. The investor has to have faith that these companies are innovative, they are going to do something new. They are going to do something different. I don't find that in the public sector. They are constrained. Indian Oil--I read Rs 450 crore is what we are losing on fuel everyday. But there are interesting opportunities in exploration. I have some investment in that sector.

Q: But they are small and midcap companies?

A: Yes.

Q: What are the chances that in 2009 you go to something much beyond the old high that you saw on the index? Do you think it is conceivable? What needs to fall into place for that to pan out?

A: America needs to go for present tense. It is important that Infosys achieves this guidance it has given. What is important to the Indian economy is the value-add that software brings. If Infosys adds 25,000 employees, it translates into 25,000 cars and 25,000 homes. Then, that in turn leads to cement and steel. It is not any small value-add. If the US grows at 4%, Indian software will grow at 40%. The sentiment of investors worldwide will be extremely bullish. If you achieve earnings of say 1,030-1,040 in March 2009, then you go to 1,200 by March 2010. So, maybe in May 2009 you are going to see a very good rise.

Q: Are you looking at 25-30 P/E multiples? 

A: For that we are still 4-5 years away. We will get there.

Q: We didn’t pass it in December last year?

A: That is why the top of the bull market was not made. The top of the bull market will be made when the value of the Indian Embassy in Japan is greater than the land in Delhi. If we had continued with the real estate led bull market in December 2007 we would have reached those levels.

Q: Do you sometimes feel apprehensive with your view today that 4,200 is a bottom worst case scenario can be violated and you may be surprised?

A: If it is violated, I would surely be surprised. But welcome this correction. I don’t think it is a bear market. It is a correction because had we continued at that pace we might have reached a level where we would have damaged that market beyond repair. It will still go much further. For that to happen, we have got to have this correction.

Q: How will you approach this phase if it pans out like you expected, one year of essentially rangebound movements. From your trading and investment perspective, how will you approach it?

A: I will limit my trading extremely. My trading levels will come to 10-20% of that level. We need a rangebound markets. I don’t buy anything at one price but buy at stages.

Q: What will you trade more in the next one year the Nifty or individual stocks? Where will the opportunities be?

A: Nowadays,, I tend to trade in the Nifty more because I find it very liquid.

Q: From an investment perspective?

A: I will see whatever opportunity comes. I am making investments. I made some investments in April, March, and February.

Q: Will you consider paring down some money and moving to cash in the next one-year?

A: I essentially have no debt or very little debt. So, I can always take debt if I find investments to be adequate. If I feel that I have such a great opportunity that I must invest and I don’t have the capital, I may sell some of my investments and interchange.

Q: So, your convinced that this is just a long painful correction in a bull market. It is not a bear market that you are seeing for the last three-months?

A: That’s what I think.

Q: Convinced?

A: Yes, 100%. Once America bottoms because the greater surprise is going to come from the World Cup markets. There is so much to come from India once this gas comes. More the power, more investment is needed. This will itself be such a big trigger. I cannot believe that the bull story, which is linked to India’s economy with 5-6% of Indian’s savings coming into equity and with the kind of Indian sprit and entrepreneurship, can die. If this is the end of the bull market then India really has incurred god’s wrath. But it may be long and painful.

http://indian-mutualfund.blogspot.com/2008/04/question-bothering-markets-still.html

http://indian-mutualfund.blogspot.com/2008/04/question-bothering-markets-still.html

Source: moneycontrol.com