Soaring crude oil prices are the biggest risk: Swati Kulkarni

Interview with Fund manager, UTI Mutual Fund

Firm crude oil prices, depreciating rupee and ballooning current account deficit are expected to keep the economic growth rate at around seven per cent for another year, says Swati Kulkarni, fund manager, UTI Mutual Fund in an interview with Priya Kansara Pandya. Edited excerpts:

Where are the Indian markets headed in 2012?
We are positive on Indian markets as the valuation is now comfortable at 13x FY13 earnings, which is close to the historical average. The downside from the current levels seems to be limited. However, in the near-term, we expect range-bound movement.

What are the likely triggers for an upside and what is the probability of that event happening?
Softening of commodity prices, manageable inflation levels and a pick-up in the investment cycle can lead to an upside. It is difficult to predict the probability as a lot depends on crude prices and other global events. However, given the below-normal world economic growth, the demand side support for a structurally high level of crude seems unlikely. We expect crude prices to remain range-bound.

So, that means there will be less pressure on the rupee?
The rupee is under pressure because of the current account deficit and capital flows, which have been volatile. The probability of rupee crossing 54 levels is grim. We expect it to remain between 52-54 levels in the medium-term.

What are key risks to the Indian economy?
The first and the biggest risk, of course, is the price of crude oil. I feel the budgeted estimates for oil subsidies may be inadequate. The second biggest risk we see is weak investment cycle, which has not seen a pick-up for some time now. This could affect consumption and future employment potential, which in turn could affect economic growth. As a result, this will keep our growth at seven per cent for another year or so.

However, I would like to put a caveat here that everything does not look gloomy at this point in time. All these concerns are fine when you are trading at 21-22 times. We are trading at much lower levels.

After raising rates 13 times between March 2010 and October 2011, the Reserve Bank of India (RBI) has not guaranteed further rate cuts after the surprise 50 basis points cut in April. Will it succeed in kickstarting growth?
We should understand that the rate hikes did not happen at one go. So, we should also be patient for rate correction and let it happen over a period of time. RBI cannot take quick steps without addressing the real problems. Currently, the base effect for inflation is expected to be favourable for some time.

But strong consumption, rising crude oil prices and current account deficit can again put pressure. By the end of this calendar year, there is a likelihood of inflation surfacing again due to supply side constraints and structural issues. Further, if fiscal deficit continues to balloon then what is the guarantee that these rate cuts will not lead to further inflation? Certain asset bubbles can be created. Thus, I feel, RBI is going in the right direction. Rather than 25 bps, having a 50 bps rate cut may have a better visible transmission.

Do you expect any more rate cuts going ahead?
We don’t expect that as fiscal correction is necessary. But at least from hereon, I don’t expect interest rates to go up further. They seem to have peaked and that trend is clear.

Which sectors are expected to do well in the coming quarters?
Besides consumption, cement and pharma sectors are expected to do well. However, energy will not do well due to price controls and stressed global petrochemical margins. Also, the engineering sector could remain subdued as order inflow momentum is yet to pick up pace.

What has been your strategy in the past six months and will that continue?
In past six months, we have reduced exposure from rate insensitive sectors like information technology (IT) and shifted to auto and banks assuming that interest rate cycle is peaking out. That would continue. Others, more or less, remain the same.

We had neutral position on consumer. We preferred cement to construction and real estate stocks. However, with likely peaking of interest rates, we may review this preference.

Source: http://www.business-standard.com/india/news/soaring-crude-oil-prices-arebiggest-risk-swati-kulkarni-/472489/

We need to review entry load ban decision again: Amfi CEO HN Sinor

Capital market regulator Sebi and industry players will have to review some of its past decisions, including the ban on entry load, if they want mutual funds to have larger retail participation and deeper geographical reach, said HN Sinor, chief executive of the Association of Mutual Funds in India or Amfi. In an interview with ET, Sinor said Fidelity Mutual Fund's move to exit India and the recent exit of chief executives of four asset management companies are worrisome. Edited excerpts:

Not many are hopeful about the health of the Indian mutual fund industry. What's your view?

Unlike banks, the AMC business has a fragmented structure - it's like a three-legged stool. You have manufacturers on one side, distributors on the second and transfer agents on the third. And on top of this three-legged stool sits the investor. You've to create a 'win-win' situation for all the three legs of the stool. There has to be something for everybody in this business. If you need mutual funds to reach out to larger geographies, we will have to review the cost structure. And if there's some push there, perhaps, we may again see some good days.

By cost structure, do you mean entry load?

One mistake Sebi made was to implement the entry load ban in a cut-and-dry manner. They should have implemented it in a slow, phased manner. The decision to ban the entry load was seen very positively by many; many said it was an investor- friendly move... many also complained about it. In those days Sebi and Amfi felt, the Indian enterprise was very smart and would find a way to come around it.

But today, after two years, I realise, we've not been able to adjust our business model to the entry load ban. We need to dispassionately review the (entry load ban) decision once again. I am not taking any sides here... I am just taking a view from the top. We've to expand this industry, and for doing that if we have to bite the bullet, we should bite the bullet.

Are you suggesting a roll-back of entry load?

We should at least initiate a discussion on that. Saying an emphatic 'no' to this, to my mind, is not a solution today. Any business settles down after 6-8 months of policy changes, but it has not happened here.

Distributors are not seeing it worthwhile to sell mutual funds. Manufacturers are finding it difficult to expand or penetrate beyond 20 cities. It does not make a business case for manufacturers to go and sell the product in Timbuktu to collect just Rs 5 - 10 lakh of investments. In such cases their costs would be very high. Why will manufacturers go to far-flung towns when they can garner a much larger amount at a lower cost from Ghatkopar? It doesn't make sense for fund houses to go beyond the top-20 cities within the current expense ratio.

But Sebi officials say distributors are still making money selling funds.

If you look at the commission pay-outs of distributors, there are just about 200 distributors who draw a gross revenue of over Rs 1 crore. Of the 200, the top-20 are institutions and banks. At an individual level, there are only 185 IFAs whose gross revenue exceeds Rs 1 crore. Of the 16,000-odd active distributors, only 185 are earning a reasonable sum of money selling funds. What will others do? They will resort to tricks like deliberate churning of portfolios or mis-selling of funds. It's this environment which is pushing them to do something which is not right. Globally, there's a cost attached to this business and it is borne by investors.

Are you talking to the regulator for a roll-back?

Sebi has been very receptive to any kind of ideas. But then it's difficult for any regulator to undo something. We need to kick-off the debate once again. We've to discuss it in a dispassionate manner.

How are mutual funds sold in other countries?

Frontloading in Singapore is about 3%; their expense ratio works out to about 2.5%. Investors there pay in excess of 5% to asset managers. Asset management business in India is the cheapest in the world. Cost to investors is lower than anywhere else in the world. We need to look at this aspect with a little open mind. My counterparts in other countries, who have plans to ban frontloading, are closely watching the impact of entry load ban in India. They're not very confident after seeing the India experience. UK came out with a consultative paper in 2009, but now I hear they have postponed their plans.

Fidelity's exit too has not gone well with the fund management industry.

Confidence level is very low in the industry. After Fidelity's decision to move out and the quick exit of four CEOs, even we're a little worried. If officials desert the industry like this, we have a big problem at hand.

Source: http://economictimes.indiatimes.com/opinion/interviews/we-need-to-review-entry-load-ban-decision-again-amfi-ceo-hn-sinor/articleshow/12860300.cms?curpg=2