Q&A: Sanjay Sinha, CEO, L&T Mutual Fund

Sanjay Sinha, CEO, L&T Mutual Fund, tells Neha Pandey the price-to-earnings ratios of Sensex and Nifty look fairly valued. Edited excerpts:

Where do you see the markets in short-, medium- and long-term?
If three factors — liquidity, valuations and events — are supportive, there is a possibility of revisiting the highs of 2008 before this financial year ends. Between one and three years, we expect an annualised return of 15-20 per cent.

Over five years, two things will guide the markets: First, compared to the global markets, the Indian markets have a strong possibility of outperformance; and second, if the strong growth trajectory that we have entered into extends beyond five years, Indian equities will outperform.

How does price-to-earnings (PE) ratios of Sensex and Nifty look?
At present, we are fairly valued. We are at 17 times the PE ratio for financial year 2010-11. The earnings projection for financial year 2011-12 is 14 times, which is below average compared with what Sensex and Nifty managed last season. On forward perspective, they are undervalued and there is room for more.

Are there any sectors that have been laggards and are expected to bounce?
We have a contrarian call on metals. This is an extremely high-beta sector, which makes investors feel scared. But, the International Monetary Fund has hinted at 4.5 per cent growth for the global economy. This will result in high demand for commodities and so the prices might not stay firm.

Where do you see the interest rates cycle and inflation?
Both will moderate by year-end. The base effect will come into play, and with a good monsoon, corporate expansion or the supply side pressure on inflation should mitigate. Today, liquidity is very tight and is affecting interest rates. With an increase in government spending, liquidity should improve and rates should moderate.

What should a first-time investor opt for?
An investor should always begin with a systematic investment plan (SIP). Since your income comes in tranches, your savings must be built in a similar way. Start your SIP the day you start earning and plan it till your retirement. However, the components of SIP can keep changing throughout your career.

A lump sum investment is made by those who want to make an opportunistic play in the equity market. However, if you want to create wealth over a long term to counter inflation, stagger your investments with a clear balance between different assets classes. Meanwhile, you can gain an expertise in stocks and then invest directly.

How do you rate a daily SIP (DIP) versus a monthly SIP?
DIP deals with volatile market conditions. At times, investors are edged to enter the market because of fluctuations, which can be mastered with rupee-cost averaging. If you feel that by allocating money on a monthly basis, you are unable to capture the rupee-cost averaging due to volatility in intra-month, DIP is an option for you. When markets become volatile, you can supplement your SIP with DIP or substitute it.

Source: http://www.business-standard.com/india/news/qa-sanjay-sinha-ceo-lt-mutual-fund/407148/

Churn in the mutual fund industry

Forecasts about the market are as bad as guaranteed returns. Both fail spectacularly. Yet on a particularly wet and gloomy September in Delhi, with the debris of CWG 2010 littered all round, just as one feels the event will finally compensate for all the present woes, the chop and change in the mutual fund industry, too, one feels, will be worth the pain.

The return of the domestic retail investor could possibly be the biggest story of the upcoming festival season. After the pain, as the retail investors come back into the mutual funds, they will face a far cleaner landscape to park their investments. With the spectre of being short-changed gone, the investors will now have a reason to believe in the vehicle they have been riding. While every country has its own pattern of investment preferences, one is sure that as soon as the turnaround happens in the world economy, the graph for investments made into the mutual fund industry will soar. Will this also benefit the insurance industry? One cannot be sanguine. The rules of the game are still being written and the insurance companies have yet to take a hair cut.

As of now, the current spectacle in the mutual fund business is messy. There is no doubt that the churn in the mutual fund industry has been the biggest gamechanger in the Indian financial market for a long time. This churn has been painfully cutting into the balance sheet of several fund houses. For sure, it has also cut into the interest level within the middle class for investing in the stock markets through mutual funds. The middle class, which feeds the retail investor category, is the bulwark of the Indian financial sector story and its absence has ensured there could be no extended rally in the stock markets for a long time.

That this has happened in the span of two years, which have been the worst periods for the financial sector globally, has not eased matters. Still, at a point when the financial sector is not throwing up news to gladden us, there are two straws in the wind that makes one believe things could pan out well. In terms of impact, while the introduction of dematerialised shares changed the technology of the Indian securities market, the clearing up of the mutual fund space is likely to alter the very dynamics of the Indian market as a means to build long-term wealth.

An early straw in the wind is the re-emergence of growth in financial sector investment by households in the latest national income numbers. Despite the global economic turmoil, financial assets as a percentage of domestic savings have risen to 11.9% in 2009-10 from 10.4% in 2008-09. Aggregate savings for this fiscal are also higher so far. The disaggregated numbers for the current year will, of course, not come in soon but matching the rise in the financial assets with the flat trajectory of bank deposits means that money is not chasing the banks.

In the current fiscal, instead, RBI data shows cash with the public has risen, disproportionately more than that channelled into bank deposits. Sure, in the same period, assets-under-management of the mutual funds have fallen for most months, except for August. Overall, this would imply that the interest in the financial sector is back with the public.

The second straw in the wind could be if—and this is a big if—retail investors lap up the Coal India public issue—India’s largest ever. The issue is coming after a string of lemons. So, in October, a change in the investment pattern will unequivocally show that investors are here to stay.

As the Indian markets gathered steam post-2003, more and more retail investors began to find the virtues of investing through mutual funds. The funds also discovered them. The number of public offers soared accordingly and the types of investment vehicles also widened fast.

Predictably enough, as the numbers invested in the schemes rose, complaints about mis-selling and high costs also zoomed. It was at this point that Sebi intervened. The one thing that the market regulator could not factor in then was the simultaneous onset of the global meltdown. Just as it took away the fun from the market, the gloom of the financial crisis worsened the confidence of the investors.

From 2008, almost as soon as CB Bhave became the chairman of Sebi in February, the regulator has moved in for what some of company CEOs called a “demolition job”. But while some of the companies complained privately about the strict regulations that Sebi rang in one after another, it appears the investors disappeared more due to the broader economic crisis.

Sebi had reason to wade into the fortunes of the mutual fund industry when it did. The Indian stock market rests on two major countervailing powers—the foreign institutional investors and the domestic ones. The latter basically included the mutual funds. The FIIs are a heterogenous set, and beyond setting the rules of what constituted a fund and the extent of market exposure, Sebi has little jurisdiction over them.

To set a timeline for a happy ending is dicey. But the makings of a good story are already in place. As one suspects, this could happen soon. The market regulator can then take pride in a job well done.

Source: http://www.financialexpress.com/news/churn-in-the-mutual-fund-industry/677979/0

Wooing MF investors with ‘go demat' drive

With mutual fund investors now having the choice of converting their folios into dematerialised accounts, registrars and broking firms are going all out to attract investors into holding demat accounts with them.

Registrars and broking firms, which have the responsibility of converting these accounts, are leaving no stone unturned in this pursuit. Some registrars are even willing to take a hit on their books for it.

cost of conversion

“We are taking the entire hit of the conversion on our books. The cost of converting the paperwork into an online account is Rs 3 and that of the courier service is Rs 25 per scheme. If we provide both services, then the conversion cost comes down to Rs 25 per scheme. We are not charging the investors for the service, nor will the fund houses reimburse us,” explained Mr Rakesh Goyal, Senior Vice-President, Bonanza Portfolio.

Bonanza has an investor base of about 1.75 lakh depository participants and about 3 lakh investors availing the services of its broking firm.

“It's a very calculated move. Our aim is to attract other potential investors. Currently we handle equity AUM worth Rs 2 lakh crore through mutual funds and we aim to bring in about Rs 5,000 crore more into the fold,” Mr Goyal added.

But not all registrars and broking firms are too excited about this move for now. Though they agree there are advantages to it, they say that there is also a flip side to it.

“Earlier, it was possible for the investors to interact with the fund houses directly. The non-demat way of transacting meant that investors got customised services from the fund houses. They could log on to the Web site of the AMC and avail themselves of their services. But that would not be possible in the demat account format. There would be an intermediary involved,” said a spokesperson for a leading registrar company.

But keeping in mind the advantages for the investors, most broking firms and registrars are likely to follow suit and provide demat services to their investors.

“Eventually, all broking firms will have to do the same. Any broking firm will want to provide these services as it gets total control of the entire transaction. Earlier the investor had to deal with a large number of people for these transactions. Also, broking firms having control over the transaction process means that purchase of each unit will start yielding brokerage income, which was not possible before,” said Mr Prakash Diwan, Head of Institutional Equity, Networth Stock Broking.

Not a big hit

However, Mr Diwan believes that the hit on the books is not that big.

“First of all the number of investors not holding DP accounts is very small. The challenge will be to get those investors who avail of our services but do not have a DP account with us,” he added.

Source: http://www.thehindubusinessline.com/2010/09/08/stories/2010090850671000.htm