Our med-term outlook for equity is positive: Madhu Kela

Where do you see equity markets heading from here?
Essentially post the election, our verdict becomes broadly positive on the market. As per general perception, markets have gone up 70 to 90 per cent from their lows. So there is always a possibility that the market could correct by another 10 per cent, may be another 15 per cent from here. But our medium-term outlook for equity is decisively positive for India.

Where is the optimism coming from? Where do you see the market improvement which is leading to the confidence?
Whatever the global situation is, in the short term, India is going to be part of that global system. So, there is going to be another downturn in the globe which may happen for whatever reason. We will also participate in that downturn. But as we are seeing whenever the recovery really takes place, India is one of the few countries where you can assume 6 to 7 per cent GDP growth for 4-5 years. It is the place which the whole world is looking at.
So in the recovery we will obviously be the fastest in the first to participate in the growth. And in the downslide though we will participate, but to that extend on an adjusted basis if you see form April 2009 till now our return is 29 per cent, merging market return is 18 per cent, and US market is 1.1 per cent. Clearly if you look at it in a 6-year timeframe, we are in a sense de-coupled or delinked globally or the inherent bullishness is getting reflected in these numbers. So India’s story remains very, very positive both for a local as well as a global investor.

Let’s understand the importance of liquidity in everything...that in a sense is very important. On an average, you look at about six to seven billion dollars from FIIs, and two to three billion from the mutual fund industry. If you really add up everything on a six monthly... that is the number of QIPs going to hit the markets.
I think this is a very simplistic way of putting these numbers. First of all, I do not believe that all the people who have announced the QIP will get the money. I think there are hundreds of announcements which are made by corporates. But I do not think all these are going to get the money. And these QIP to get subscribed surge should go to 6000 NIFTY, all over again people have to really scramble for shares. Any which way our argument is being fulfilled any which way. Secondly, don’t forget there is too much of insurance money which is coming into the market. As an investor I am very happy to see these corrections in the market. These are our chance and opportunities as Indians to employ our money into equity markets. So, if market goes up parallely in hind side, you see between October and December was a golden period to make investment in the equity market. In fact, these corrections have to be viewed as an opportunity rather than as a threat for a long-term investor. I am not here. I don’t even understand the market. I have tried to understand it, but have failed. I must admit that what can happen in 10 to 15 days, I don’t know. Its traders’ delight and better left to traders. But as an investor, mid and long-term call on India is positive. Every decline of any meaningful size should be used as an opportunity by investors to up their equity weightage.

Keeping in mind the importance of the month of July, the Budget and monsoon, not many people are talking about monsoon despite its importance for the economy. So once we wrap up the month of July, will we get the directional call for the next 6 months?
I think monsoon is, as you rightly mentioned, a big thing. Don’t forget we are only 15 per cent dependant on agriculture. I think a larger portion of our consumption is also linked to how our agriculture output is and ultimately we are 100 cr people and we need water for everything. So I think monsoon is a very important thing and we are relying on god for that. I am not assuming that as a significant threat, but that could turn out to be a threat which could possibly have even a bigger correction in the market what I earlier mentioned. Budget I think I am not too nervous. I think people who are sitting in the chair are reasonably intelligent people. They know what the expectation from them is, and I am sure they will deliver. Good thing is even market is getting nervous before the Budget. So there is not too much expectation in that is being built from the Budget perspective. Earnings, by and large, will be better than what they were in the last quarter, but again from a near-term earning perspective, is there any dispute that markets are reasonably valued? They are, but we are not making a case of markets going up from a next quarter earning perspective. We are optimistic on the next 2, 3 year earning perspective which is a call we have to take.

The growing point...
No I don’t think crude will go up above 150 dollars for us. Crude stays at 60 to 70 dollars, and we are fine. Commodity prices are still half of what they were at the peak. As long as they do not go all the way up, we are still ok. As far as inflation is concerned, you know India can and should afford 4 to 5 per cent inflation. I don’t think there is anything wrong with that number and there is a school of thought which is coming that there is too much liquidity being pumped in the world and the world inflation itself might go up. To some extent, there is merit in that argument but don’t forget that a lot of industries in the world are still operating at 50 to 60 per cent. So the question was not capacity. If prices go up, so the capacity will also get unlocked and that will start to work. So you can make all these arguments as to what will happen 12 and 18 months down the line on inflation front, but I do not think that is a terrible worry as of now.

Last cycle in raising cash, have you followed the same cycle the minute it crosses 4300, 4400 in Nifty? You have raised enough cash. It will plough down when the markets come down.
We have not raised any significant incremental cash because you know I must admit I also realized one thing that you know given that we are not expected to raise significant cash because the flip side is that ultimately you can’t time the markets. So we have not raised any significant cash, but at the same time we have not deployed all the cash which we have. We have continued to reshuffle our portfolio which we have. Whenever we find that this reward has turned against us, we continue to sell those companies and raise cash and look for opportunities where we are deploying cash so net net we are haven’t raised any new cash as compared to what we used to have.

You think time has come when you can start looking at large companies where balance sheet damage has been large but when liquidity changes, large caps get the fruit and mid caps get the bread crumbs. Do you think it is time to revise mid-cap stocks which have been tarnished 80 to 90 per cent?
Undoubtedly, let me repeat undoubtedly. I think ultimately market has already given 80 to 90 per cent return. A lot of large cap companies are fairly valued. There is lots of value and portfolio value will come from alpha. Basically what stocks you are able to identify and the time-frame for which you are able to hold them. It is already visible. You see from the bottom and you see from where we are today. You will see there are so many stocks which have given 200, 300, 400 per cent return and there is still debate going on in televison whether it a bull market or a bear market. So I think you know the reality is that on an individual company basis, if our time-frame for 3 to 5 years is bullish, we will continue to follow that model and continue to find the larger mid cap names. Let me emphasize, we are not looking at very very smaller companies, given the size doesn’t make sense, but we are still looking at larger mid cap companies where we could deploy decent amount of money and hope that in 3 to 4 years they will definitely give us much larger return than the appearing groups in the large cap in that segment.

For mutual funds, exit load and entry load are important factors. They are important as far as the chain is concerned....
There is an all around confusion that how distributor has been an overall link in getting the sources to the industry. You know our money or most of the mutual fund money has come through distributors. In the new arrangement, the distributor has to change charge to the investor rather than getting their commission from the industry. I think that in due course of time, the investor will realize what a value and distributor does play a very very important role in this entire value chain. But there is a value proposition which the distributors are putting and they will start to recognise that they need to make their commission for putting this value proposition.

Where do you see earnings or business cycle generally as theme not revival, going forward.
I think there is one area which I am not talking, not from a short-term perspective. In the medium to long term, we think you know currency will appreciate because in India if hypothesis plays off, we are expecting that lot of foreign money will come in. What format that will come in we do not know, but clearly there will be a lot of money which will come in. So companies which are depending on foreign exchange and currency for their earning growth will get impacted in mid and long term.

Source: http://economictimes.indiatimes.com/Madhu-Kela-Head-Equity-Investment-Reliance-Mutual-Fund-talks-to-ET-NOW/articleshow/4691948.cms

Distributors to boycott products sale

General (non-banking) distributors of mutual fund schemes are up in arms against the recent Sebi directive, giving investors the right to negotiate commissions while buying MF products through them. As a mark of protest, some mutual fund agents’ associations have decided to boycott sale of MF products starting July. These associations are also likely to file a writ petition against the Sebi ruling. Prominent among these are MF associations from Aurangabad, Akola, Amaravati, Nagpur, Nasik and Chennai. Industry observers say the move will hurt smaller distributors more, as the larger players will find ways to circumvent the Sebi ruling. “Investors in Tier-II and Tier-III cities are not mature enough to understand the worth of the advice given by a MF distributor, hence it will be difficult to convince him to pay a commission for the same,” according to Mukesh Chothani, president, Nasik ARN Agent Association. “The (Sebi) ruling will make our task of collecting advisory fees almost impossible. We would be better off selling insurance and post office products.”
Till last week, investors buying mutual fund units through a distributor were subject to an entry load of 2.25% — the margin that asset management companies pay distributors for bringing in business.
Last year, Sebi abolished entry load for those investors who purchased mutual fund units directly from fund houses. This, however, evoked a tepid response with 95% of the applications received by AMCs coming through the distribution network.
With Sebi banning entry loads altogether last week, the commission payable to a distributor will now be mutually agreed upon by the investor and the distributor.
This raises another concern for the general distributors that if a scheme recommended by them fails to perform, there is a fair chance that some angry investors may drag them to consumer courts as they would be bound by a contract with the investor who has directly paid them a commission. Also, as the AMCs are liable to pay service tax on commissions to distributors, this ruling raises concern on the loss of revenue to the government. Not all agents can be expected to pay the service tax loyally to the exchequer.
The impact of the Sebi ruling is being felt not only by the MF distributors but also by the MF houses (AMCs) who foresee an adverse impact on their expansion plans. “The MF industry is currently aiming to increase its retail penetration and this involves cost. An entry load does help to partially fund this ambition and thus must be seen as a marginal charge in the context of potential returns from this asset class over the medium- to long-term,” says Ajay Srinivasan, chief executive - financial services, Aditya Birla Group.
“However, the recent Sebi announcement has raised questions on the practicality of these expansion plans. It is also important to note that even products like RBI bonds and fixed deposits have an upfront distribution charge,” he added.
The MF industry is already struggling to keep pace with the ever expanding insurance industry whose products like unit-linked investment plans are similar to MF products, but fetch a much higher commission for distributors. However, Sebi chairman CB Bhave clarified recently that the onus of convincing the investor that an MF product is far more cost effective than an insurance product lies with the MF industry only.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/Distributors-to-boycott-products-sale/articleshow/4689838.cms

Funds shuffle scrips as Nifty floats

The shift in S&P CNX Nifty, the favourite index of numerous investment schemes both at home and abroad, to a new system of computation is likely to get the fund managers busy this week.
The index, which is a benchmark for at least 73 equity diversified schemes of Indian mutual funds, is going for a major change in its composition.
The National Stock Exchange's flagship index will shift to free-float capitalisation method from June 26.
Under the method, the weightage of each of the 50 component stocks in the index will be proportionate to the amount of free float.
Free float is the number of shares of a company in public hands --- stock that is "floating free", that which is not with the promoters.
Globally, most indices are moving to this system as it is perceived to be more representative of market action.
Experts say, with the new system coming into vogue, funds would need to adjust their portfolios accordingly.
"Managers who are tracking the Nifty closely, may have to make allocation changes. People who are mirroring the index should make bigger changes," said Deepak Mohoni, MD, www.trendwatchindia.com.
Benchmark indices are important to two broad kinds of investment schemes: ones that track market indexes (index funds) and funds whose managers choose securities to buy and sell (actively managed funds).
While index funds mirror the index components, active funds operate on a relative return basis, wherein performance of the fund is judged by comparing it to the performance of the benchmark.
Some of the action is already visible in the prices. Stocks which are bound to lose weightage post this reorganisation, especially the PSUs, are out of favour.
"A significant portion of the adjustment has already played out and one can see the result of that in the fall of NTPC and ONGC and the outperformance of L&T and private banks," said Anand Shah, head of equities at Canara Robeco MF.
While Reliance Industries will retain its position as the top-weighted stock due to its high free-float component (50%), ONGC and NTPC are likely to lose weightage.
Oil and Natural Gas Corporation (ONGC) has the second-highest weightage (8% )in the Nifty under the Total M-cap regime. This is bound to come down to 3.5%.
Similarly, the index weight of National Thermal Power Corporation will drop from 6% to 1.9%.
The reverse will also be true as some stocks such as Infosys will have a high free-float gain at the expense of these.
The weightage of Infosys, currently at 3.77% in the Nifty, will increase to 7%. So an index fund will appropriately double its holding of Infy shares.
ICICI Bank will increase its weightage from 2.96% to 6.45%, while Larsen & Toubro goes from 3.27% to 6.41%.
Some absolute-return products based on the index and long-term players like insurance companies who tend to mirror the index would go for shuffling of portfolios, said fund managers.
"Arbitrage funds and structured products, which track the Nifty, would also see some changes made. The majority of the action would take place on June 26 for index funds," said Gopal Agarwal, head of equity at Mirae Asset Global Investments.
Jayesh Shroff, fund manager at SBI Mutual Fund, said, insurance companies and the funds managed by them are more likely to be affected by such a change.
"As far as they are concerned, it would already have started," said Shroff.
The effect on the broader will be very short-term, feel experts.
A Balasubramanian, CIO of Birla Sun Life Mutual Fund, said there might be some minor changes in the portfolios of schemes. "A fund manager will change his scheme's holdings on the basis of valuation rather than events such as these," Balasubramanian believes.

Source: http://www.dnaindia.com/money/report_funds-shuffle-scrips-as-nifty-floats_1267546

Select the right diversified MF to prosper

Diversified funds are one of the most popular mutual funds around. They are the oldest funds in India, and there is a wide range of funds in the market from various fund houses.
So it comes as no surprise that it is quite confusing for a normal investor to select the right fund for his investment needs. Hence, if you are in a dilemma about how to select the right fund, then read on to get help on the selection criteria.

Check the fund's returns against its peers: When you are choosing the fund for its performance, always compare its returns against those of its peers. E.g. it doesn't make sense to compare the returns of a large-cap fund against a mid-cap fund as mid-cap funds tend to offer higher returns by taking higher risks. Also ensure that the performance is compared against longer time-frames, since the fund can give extraordinary returns for a short period but may fail to deliver over longer periods. It will help you check the performance of the fund during various market cycles.

Check the fund's returns against its benchmark index: Find out how the fund has fared against its benchmark index. Always ensure the fund's performance is consistent with the returns from its benchmark index, if not better. In case of market crash, ensure the fall in the fund's value is not more than its benchmark index.

Watch out for the past performance of the fund: This is another important comparison, as during the stock market rally, all the funds benefit. But during the market crash, many of these funds show dismal performance. So take care to ensure the fund is not a one-off winner, but a steady performer. It also means avoid new funds, since they do not have any history to prove their performance.

Risks taken by the fund to generate returns: With returns being the prime focus of the investors at the time of choosing the fund for investment, many funds tend to take higher risks to generate high returns. If the fund takes exceptionally high risks, it is very likely to be affected when the market crash comes.
To find out the risks associated with the fund, take a look at Standard Deviation (SD) and Sharpe Ratio (SR), which is the risk-adjusted returns. SD for the fund chosen must be lesser than its peers, while SR should exceed its peers. These values are available at various mutual fund websites that rate the funds based on these two parameters.
When selecting the mutual fund for investment, remember to carry out your research carefully. This is because it is your money at stake. Once you are invested, it is difficult to redeem your investment without paying penalty.
Always avoid new funds and NFOs since they do not have any track record. Also certain funds like mid-cap and small-cap funds will be riskier than large-cap funds due to the inherent volatility of the underlying assets.
Similarly, ETFs and index funds will be less risky than actively managed funds, since they just replicate their benchmark index. But in the process of playing safe, don't give up on earning good returns. Hence ensure you establish a balance between risk-reward ratio, to earn good returns while minimizing your risks.

Source: http://business.rediff.com/report/2009/jun/23/perfin-select-the-right-diversified-mf-to-prosper.htm