India delivered better returns than most: Madhusudan Kela, Head-Equities, Reliance Mutual Fund

His rise within the organisation as well as in the fund management industry has been dramatic. But for the past few months, there has beenspeculation that Madhusudan Kela, head-equities, Reliance Mutual Fund, is quitting. Untrue, insists Mr Kela. In an interview with ET, he says that he is still bullish on the big picture India story. However, in the short term, global sentiment will prevail, he cautions.

How do you see the market playing out near term in light of global developments?

In the next 6-12 months, the market will still be ruled by global sentiment. The ongoing debt crisis in Europe can have a meaningful impact on markets globally as in India, if the situation worsens. If one or two Eurozone countries were to default or the euro as a currency breaks down, there will be chaos.

Similarly, if there is slowdown in China, the Indian market will be impacted. Currently, the Indian market is trading at a 25% premium to China. If China’s earnings multiple contracts, there could be a valuation challenge for India as well. However, we have seen over the past six years that the market has produced significantly better returns than most countries in the world. The India story is getting stronger.

For instance, this year, you will see a significant fiscal consolidation, which was a major worry for the market. Over the next 2-3 years, the gas and oil reserves will materialise and this will further improve our fiscal position. And the real dark horse could be the UID project which can significantly prune the subsidies and improve tax collection. And hopefully, the pilferage will reduce. I believe a 8-9% growth with more reforms from the government looks real in the next five years.

How steep do you expect the correction, if it does come through, to be?

If the situation in global markets worsens, we could even see a 15-20% correction in Indian shares. But since India’s fundamentals are only getting better, and viewed in the global context, overseas fund managers will be compelled to increase their exposure to India. Any meaningful correction will be a great buying opportunity for retail investors with a long-term view on equities.

Which are the sectors that interest you?

We continue to remain overweight on the pharma sector. We are bullish on companies which will benefit from the domestic consumption story in India. We like public sector banks. They have underperformed the market for a while due to concerns over rising bond yields and hence marked-to-market losses on the bond portfolio.

Our view is that PSU banks can grow their loan books 25% for each of the next three years, and they have the capital adequacy to meet the loan demand. The stocks are available at 1.2-1.5 times their book value, and you can’t go wrong if you have a 2-3-year perspective.

There is a lot of pessimism about the telecom sector, more so after the recent 3G bids. Would you take a contrarian view?

Much of the bad news in the sector is behind us. If these stocks see any sharp correction, we would definitely buy them. The stock prices may have underperformed over the past couple of years, but the customer base has more than doubled during the same period.

What about mid-cap stocks in general? Would you still go for them in current market conditions?

Yes, if there are opportunities, we will continue to invest in companies with scalable business models, with earnings growth faster than large-caps, and available relatively cheaper to large-caps.

Your strategy of betting on mid-caps in a big way has been criticised by your peers. They accuse you of boosting portfolio returns by buying into firms with low-floating stock.

Companies like Siemens and Jindal Steel & Power were mid-caps when we first bought them. Not only have they delivered better returns, but are now ranked among the large caps. But I must admit that there have been some wrong bets as well. We have tweaked our mid-cap strategy a bit. We will not buy into very small companies, and would focus on companies with a minimum m-cap of Rs 1,000-1,500 crore.

Locally, what are the factors that could dampen sentiment for stocks?

Below average monsoon would rank high on that list. The reforms process needs to be accelerated. The government has shown resolve, but it needs to build on it, especially in terms of attracting more FDI flows. Rising instances of Maoist and Naxalite attacks could make foreign fund managers nervous. We are highly dependent on inflows at this stage, because there is not much money coming in locally.

How much cash on an average would you be keeping in your portfolio? Your strategy of aggressive cash positions last year was criticised in industry circles.

We will use it more as a tool to improve the portfolio mix. We will not shy away from keeping a higher cash level than our peers if market conditions warrant. But it will not be as high (25%) as was the case last year.

Source: http://economictimes.indiatimes.com/opinion/interviews/India-delivered-better-returns-than-most-Madhusudan-Kela-Head-Equities-Reliance-Mutual-Fund/articleshow/6044698.cms

Mutual funds hit a hurdle on regulatory changes

The past one year has been trying times for the mutual fund industry. Mutual funds, on the path of recovery from the ills of economicdownturn, were hit by a barrage of regulatory changes, a good number of them limiting the operational scope of mutual funds.

Just when the industry was coming to terms with the clampdown on fixed maturity plans (FMPs) and inter-scheme transfers , the Securities and Exchange Board Of India (Sebi) dealt another blow in the form of entry-load ban.

Despite serious protests from mutual fund distributors — numbering over 70,000, the regulator imposed the ban from August 1. Sebi further asked fund houses to disclose all commission, trail or other benefits received by them (from asset management companies) for advising a particular scheme to an investor.

Almost a year into the entry load ban, mutual fund distributors are still unsure as to how they go about doing their business. According to independent financial advisors (IFAs), generous investors pay 0.5-1 % as fee for selling a mutual fund scheme. If the investor makes an investment worth Rs 50,000, the distributor gets just around Rs 250 (at 0.5%) as their commission.

“It is not worth our effort to sell funds at such low commission payouts,” said a Mumbai-based distributor. There are also worries of cheques (given by investors) getting bounced (that increases the cost of recovery) or not being remunerated at all by investors. The Sebi mandate to disclose commission, trail or other benefits received by the distributor/advisor is also not in the right spirit.

Large-size distributors are still offering “extra toppings” to recommend schemes. These include small cash incentives, event sponsorships, advertisements in in-house magazines (of the distributor), expensive gifts and sponsored tours.

Lack of proper incentives for distributing equity mutual funds are prompting distributors to hard-sell insurance policies, company deposits and portfolio management schemes.

After distributors, Sebi has now trained its guns on fund houses; the first step was to discourage fund houses from raising exit load on mutual funds. It dealt another blow to fund houses asking them to pay upfront commission to distributors from their own profits and not from the expense pool.

In a ‘confidential’ email communique, the regulator directed fund houses not to charge upfront commissions to the overall 2.5% expense charges, which until recently was split in equal proportions to meet asset management charges and expenses (including upfront commission, transfer agent charges and marketing expenses).

Just a week ago, at the board meet on mutual funds, the regulator told asset management companies (AMCs) not to indulge in ‘dynamic pricing’ while managing debt funds. Fund houses, in their bid to attract more investments, do not levy asset management charges on institutional investors when portfolio yields come off sharply.

Likewise, when yields go up significantly , fund houses charge a higher expense ratio on institutional portfolios, making good the loss (of fund management charges) they have suffered when yields go down. The market regulator has told fund houses to stop this practice and limit changes in fees to 5 basis points on a daily basis (or 0.05%), or 0.5% in a year.

According to sources, this is not a good move for the industry. “The competitive edge of debt funds, which are striving hard to get institutional money, can only be maintained if pricing strategies are left to the fund house,” said the marketing head of a bank-promoted fund house.

“We maintain our competitive edge by discounting expense charges to institutional investors. If dynamic prices are taken away, there will be nothing to differentiate among fund houses, at least for the bulk investor,” the marketing head said.

The regulator also quashed the mutual fund industry’s demand to allow flexibility in the use of the expense ratio of 2.25%, which mutual funds deduct annually from investors’ net assets value (NAV). Mutual funds made a proposal to Sebi to do away with all cost bifurcations within the expense ratio charged on equity funds.

The regulator agreed to remove all cost bifurcations, but wanted mutual funds to reduce the expense ratio to 1.5% (from 2.25%). This was not acceptable to AMFI and members of participating mutual funds. The Sebi mutual fund panel decided to maintain status quo on expense ratio at 2.25%.

Source: http://economictimes.indiatimes.com/Features/Financial-Times/Mutual-funds-hit-a-hurdle-on-regulatory-changes/articleshow/6042494.cms?curpg=1