MFs hardsell SIPs to investors

With equity investors increasingly booking profits, mutual fund distributors are pushing SIPs or systematic investment plans to them. A sales head of leading fund house said, “After we saw markets touching the 20,000-levels, several investors booked profits. Some of that money is coming back in the form of SIPs.

He added that distributors are once again being given good commissions from the pocket of fund house to lure such investors back.

R. S Srinivas Jain, CMO of SBI Mutual Fund, said, “We are witnessing sudden rise in SIP and in the last one month we have added 1.5 lakh new SIP accounts.”

SIP is a mode of investing into equity funds, in which instead of lumpsum investments, an investor buys units each month, thereby averaging his cost of units. This is either done by regular transfer from a liquid fund or from the bank account.

However, the mutual funds houses are not giving upfront commission this time, instead they have increased trail commissions to push SIPs. B Sarath Sarma, ED of IDBI Mutual Fund said, “When equity markets go up, interest of investors as well as of distributors increases (for equity funds). We are witnessing distributors selling equity funds once again with some upfront commission. Also the trail commission has been increasing as it gives portfolio advisors an incentive to encourage investors to hold for a longer period.”

Trail commission, as opposed to upfront commissions, are paid either yearly or semi-annually to the distributor as long as the investor stay invested in the scheme.

Now fund houses pay anywhere between 25-50 basis points as upfront commission, while trail has been increased to 50-75 basis points. Before the market regulator bought ban on entry load from August last year, distributors were paid a upfront commission of over 1%.

According to IDBI MF, new SIPs account are coming not only from top metro cities but also from the Tier-II and Tier-III cities like Indore, Vijayawada and Nagpur, where there is renewed interest in equity market. According to a report published by the Boston Consulting Group (BCG), SIP inflows have been the saving grace for mutual fund houses especially during tough times. Also, SIP inflows as a percentage of overall inflows have increased over the years. The report stated that, SIPs accounted for about 19 % of inflows in the first quarter of 2010 while it was 15% in 2009 and 11% in 2008.

Source: http://www.financialexpress.com/news/mfs-hardsell-sips-to-investors/690204/0

Redeeming your mutual fund? Get the signature right

With stock markets near their all-time highs, several investors have been looking forward to cashing in on their tax-saving mutual fund investments made in 2004-2006. But some investors who tried redeeming units have faced rejection of their redemption requests.

“Looking at the market, I sent out a redemption form for my tax-saving mutual fund that was made in 2006-07. I got back a letter saying ‘Your signature is not matching and hence, we cannot process the redemption’,” a Mumbai-based mutual fund investor told DNA.

It is not this individual alone. Several distributors have confirmed that their clients who put in redemption forms have got similar letters.

Paul D’Souza, who runs Cuzinns Investment Services, said, “There have been three-four of cases with my customers where the redemption requests were rejected. One of them is an investment made in 2006. The reason being cited is that there is a signature mismatch.”

“Some asset management companies (AMCs) are not telling investors the reason for rejecting. They are asking customers to get the signature attested by the bank,” D’Souza added.

Another mutual fund distributor — Rajendra Dhulla, a financial planner who runs advisory firm Pratham Services, said: “There have been 7 cases last week, where redemption requests were rejected as the signature didn’t match.”

Though the numbers are small, even these occurrences were earlier rare, say distributors.

“It is not a major or substantial part of the total redemptions. It is around 1-2%. But in the past, we have never seen even this small percentage of cases in redemptions happening. Most of them are in September 2010. I have had 6 customers whose redemption requests got rejected and they were asked to go to the bank and get the signature attested,” says a financial advisor who requested anonymity.

“In one case, the investor was a minor and two guardians had signed on his behalf. So the request was rejected. Upon prodding, we found that the problem was because the guardians had signed at the wrong place. One of them should have signed as the first applicant, but the two guardians had instead signed as second and third applicant,” the advisor added.

When we questioned AMCs about the issue, they said there were not too many cases of rejection due to signature.

“Signatures change over a period of time. It is our fiduciary responsibility to make sure it is matched because we have seen mind-boggling frauds happening in the financial services industry.

We need to be guarded or somebody can take us to court,” said a mutual fund official, explaining the reason for the rejection.

Asked how they distinguish and determine whether the signature is not matching, the official said, “Handwriting is a science. There are strokes and the flow that you look at.”

But actually, it is the mutual fund registrars who determine whether the signatures are matching or not, as they store the data and the application forms.

A senior official at one of the two mutual fund registrars told DNA Money, “There is no significant increase in terms of rejection of number of redemption requests. Largely, signatures match. But in case of an old-time investor, there is a possibility that the signature has changed. We reject only if the strokes are drastically different.”

Some cases are surprising. Dhulla, of Pratham Services, recounted this case of investments made in 2004-05: “In September, we sent two redemption requests by a single investor to the same asset management firm. One request got through the other did not. Coincidently, the markets went up after that day, but it could have been the other way round.”

When DNA Money asked an MF registrar about this case, the official responded, “The specific case has to be analysed, but that may be either because people use regular signatures or short signatures. You may have entered into one scheme with a regular signature and another scheme after two months with a short signature. If you redeem after six months, signatures in both master applications may not match and hence, the signature submitted at the time of redemption may not match.”

Getting a bank attestation of the signature is the only way out. “The compliance is difficult after the signature mismatch. One needs to get a bank verification and PAN card. The bank verification of signature is costly. Banks charge as much as Rs 100 per signature attestation. For each request they will ask for Rs 100, so if you have four requests, then you have to pay Rs 400 just for signature attestation. Some AMCs also ask for the bank official’s name and employee code to be mentioned on the signature attestation. But banks are hesitant to give it,” said Dhulla.

The problem with rejection is that the investor does not get the net asset value (NAV) of the day he put in the redemption request. And the NAV on the day the bank attestation comes in may be lower or higher, depending on the market’s movement.

“There should be a facility to lock in the day’s NAV when the investor put in the redemption request. In case of signature mismatch, MFs should ask the customer to get the verification letter and then process the redemption,” suggested Dhulla.

The registrar official said this is not feasible. “I may submit a request today, and if it is rejected by the system, at the time the intimation comes in I may choose to hold it back. I may not submit the redemption request later it all. It can be either way.”

So when sending in a redemption request for your mutual fund, make sure you sign the way you had in the original application form. That way, you can capitalise on the market rally at the right time.

Source: http://www.dnaindia.com/money/report_redeeming-your-mutual-fund-get-the-signature-right_1444896

U K Sinha is New AMFI Chairman

UTI Asset Management Company chairman and managing director U K Sinha has been appointed as the chairman of the Association of Mutual Funds in India (AMFI), an industry body of the mutual funds. Sinha will replace present chairman A P Kurian.
The board of AMFI has also appointed HDFC Mutual Fund managing director Milind Barve as the vice-chairman of AMFI.
In a press statement released on Tuesday, AMFI said that U K Sinha, Milind Barve would bring with them vast experience in the financial services sector in general and mutual fund Industry in particular.
On his appointment, Sinha said “The mutual fund industry is at the cusp of transformation and we have challenging times ahead. My priority will however, centre around investors and investor servicing”.
Milind Barve, the newly appointed vice-chairman of AMFI, said, “Mutual funds as an asset class are genuine wealth creators for a large number of retail investors. On a long-term basis, mutual funds give investors much better returns than other investment products”.
In February, AMFI appointed H N Sinor as its chief executive officer.

Source: http://www.valueresearchonline.com/story/h2_storyView.asp?str=101408

It's biz as usual for MFs despite load ban

Indian fund houses, reeling under the impact of a ban on entry load or an upfront fee that they collected from investors to pay distributors, may have something to cheer about, with a majority of these intermediaries saying that they expect the ban to either have a positive or no impact on the future of the industry. A survey of 622 distributors in Mumbai and Delhi by Cafemutual, a Mumbai-based mutual fund industry tracker, shows that 57% of the participants expect the ban on entry load to have positive or no impact on the future of the mutual fund industry.

The , imposed by capital market regulator the Securities and Exchange Board of India (Sebi) and that came into force in August 2009 to prevent distributors from pushing clients to switch across products in shorter durations for fees, has prompted 31% of the IFAs or distributors surveyed to ‘try charging’ fees to their clients, Cafemutual said. Significantly, 79% of those who tried were successful, the survey said.

Prior to this ban, distributors of mutual fund products got their upfront fee of 2.25% money they brought in from the AMCs, which deducted the commission from the investments.. Sebi felt the routing of commissions through AMCs resulted in distributors pitching for products that were not in the best interests of investors.

The regulator said that investors needed to pay distributors directly for selling a product rather than obtain the fee through AMCs. According to wealth managers, most investors, who put money in mutual funds, refuse to pay fees for advice, leading to many distributors shifting to selling other products, including insurance. But even distributors are getting more comfortable with the role of advisors, they said.

“There are fewer distributors and IFAs which are selling mutual funds after the ban on entry loads, but some, including us, are focusing on the advisory business. As long as the investor is ready to pay us for our advice, we will give advice and this can be a product that suits his needs...not necessarily a mutual fund or insurance product,” said Om Ahuja, head-wealth management, Emkay Global Financial Services.

The Cafemutual survey said that according to 63% of the IFAs, Ulip sales rose due to the entry load ban, while 15% said sales of structured products to the wealthy went up.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Its-biz-as-usual-for-MFs-despite-load-ban/articleshow/6648205.cms

Market rally means mutual funds are feeling good too; but novices beware

With the market racing toward record highs, the story of foreign inflows as they pertain to the market as a whole has been well documented. Vijayan Kirshnamurthy, CMD, IDBI Asset Management explained the impact of a rising stock market on equity-based mutual funds. IDBI was awarded rights to MF licensing in May and the ride along the market has been fruitful for the public sector undertaking and the potential for even greater growth is not lost of Krishnamurthy.

However, this week’s events are just part of the big-picture story that is growth of the Indian economy and more specifically the Indian equities market, he explained.

Krishnamurthy puts this week’s action on Dalal Street in perspective, reaching all the way back to May 17, 2004 when the market’s 800 point fall in 23 minutes coincided with uncertainties in economic policies coming from Delhi. What followed was a “knee-jerk reaction” which pushed the market from 5,000 to 14,000 44 months.

In this interview excerpt, Krishnamurthy explains. to Kartikay Mehrotra, the market’s tendencies to pick extremes and how best to play them in a largely unpredictable, highly volatile environment.

What a week, what a last couple of months. How has the activity in the equities market affected equity-based mutual funds?

Our tracking has been at about .26 per cent, so the activity for us has been extremely beneficial. What we’re trying to do is get those who have paid out on one mutual fund or are trying to pay out on another, to get them some cash benefits. Investors under passive management like to take a little cash home when things go up. We are seeing more inflows, as a there is no fund manager involved here. Those who have been around and have seen their net asset values (NAV) going down might want to see their money for a while, then give it back. Then again, I don’t think anyone has ever been able to call the market right, so it’s tough to say which is right which is wrong, which is gaining more.

Do you believe prospective investors have been alerted? Is the 20k mark like an alarm sounding in the wallet of investors who may have had their back to the market since 8K or 15K? Do you expect retail inflows in equity-based MFs to go up now?

Markets tend to exaggerate either way. In 2008, you saw a market float around 8,000 while GDP was at 5-6 per cent. It was down from 8 per cent, a 2 per cent fall which resulted in 60 per cent erosion in the market, so for two years, they waited As they saw the index of industrial production (IIP) go back up, we all waited for the market to go up, but it didn’t happen immediately. It was unpredictable, it took its time. Then suddenly everyone jumped on and the Sensex went from being a lag indicator to being a lead indicator overnight. But when it does that, it does it dramatically. So once it hits 20,000, everyone feels like there is a great likelihood that it’ll breech records. At 21,000 everyone will be looking to book profits. People should remain cautious; there’s no need to throw money at the market, but there’s a lot of upside. Obviously there will be a correction and people need to understand that too.

Were former investors and prospective investors jumping back on the market as it climbed toward 20k or were there more people on the outside looking in, just watching the numbers rise and rise?

Lots of people watched it which is evident in inflow numbers of most mutual funds. People were very skeptical from 15-18,000. Ironically, the best month for trading in the last few years was January, 2008. Buy-in-large, investors don’t come in when markets are bad, they’re already bad for that reason. A good investor comes in when markets are good, but remain through a bad cycle and makes good money when the market recovers again. In a growth market like ours, there will always be volatility. But you can never say that something good won’t happen. In a growth market, there’s never a bad time to invest, but as I said, there will always be volatility.

In a flat-ish economy, the market will remain volatile with less extremes.

What advice are you giving these days? Is it time to play it safe, is it time to dive in head-first, is time to put your money back under your mattress while anticipating another free-fall?

For the last 10-years, as far as India is concerned, there’s no such thing as the wrong time to invest, there is only the wrong time to get out. Industry is growing at 10-14 per cent. In that kind of economy, will the index stocks do less than that? It’s highly unlikely. Then what’s the downside? In certain periods, there will be a down pressure caused by volatility. But that’s it. The longer you stay invested, the better your chances of reaching your personal benchmarks.

You say there’s never a bad time to invest, but under such volatile conditions, it must be tough to tell how to play the game, especially if you’re not an expert trader. What advice do you have for the novice?

See, traders have a lot of competence and can play the market expertly. They know the risk, they can face debt and can recover Then there are investors taking a long-term call. And unless you are capable of going along for the joy-ride, and gambling like a you’re at a casino or in horse race, you should stick with the index stocks. It’s a global phenomenon, the only guys who makes money is the one who sticks around for a very long time or plays very short-term by trading over a couple days, hours or even minutes. So take a position, one or the other. If you take the short-end, you should play the marketplace; you’re trading, you’re playing and you’re not caring about the companies themselves. If you take a long-term call, then say you’ll be invested for 2-3 years. As i said, the best way to do that for a guy who doesn’t have all the information is to buy an index stock.

Tell me about this Nifty Junior. How many subscription applications did you receive? Who’s applied, what’s the makeup?

We have amount the biggest Nifty junior funds a 54 crores. At our NFO period, we didn’t do a big launch, but we collected something like 8000 applications. It mostly serves as a retail product for retail investors.

Generally, how have things gone since SEBI gave you licensing to launch MFs? As expected? Better?

It was May when we received licensing permission, so it’s three months old now. We’re doing pretty good at 3,250 crores on the 26th of August. In those three months, we’ve overtaken 13 of our competitors. We have a very powerful institution in tact. What we’re trying to do is to see whether we can use our 700 branch network to get applications on the retail side. As a PSU we have all the advantages of people thinking were’ here for the long-term.

Source: http://www.expressindia.com/latest-news/-Market-rally-means-mutual-funds-are-feeling-good-too--but-novices-beware--/688502/

Life beyond 20,000: Invest carefully

With the equity markets retesting historic highs, you now need to frame your investment strategy carefully. After all, it’s better to be safe than sorry, as the adage goes.

Though India is in an economic sweet-spot presently, the world economy and the financial system face considerable imbalances and uncertainties. Any adverse global development could cause this gush of liquidity, primarily responsible for the swift run-up in domestic equities, to reverse direction pretty quickly leave India.

The way forward

Here are the possible courses of action available to you while framing your investment strategy at this point of time.

1. Invest: Indian equities still offer attractive wealth creation opportunities over the long term. You may hence consider investing into this market if:
Your investment horizon is at least five years and
Your allocation to equity is less than what you had desired or planned and
You are ready to stomach the interim gyrations of the market

Mr. Vikramaaditya, Chief Executive Officer, HSBC Asset Management (India) Pvt. Ltd., shares, “There may be volatility in the short term but the long term growth story is intact. The key to any investment strategy would be identifying the right investment opportunities.’

You may phase out your investments by using Systematic Investment Plan (SIP) for deploying fresh inflows into predominantly large cap funds. If you have a lump sum, you may consider a Systematic Transfer Plan (STP) from short term debt fund to equity fund, gradually.

Tax saving ELSS investments may be phased out over the remaining six months of this financial year. You may consider arbitrage funds for shorter terms as higher market volatility is conducive for such funds.

2. Rebalance: If the sharp run-up of the recent past has skewed your asset allocation towards equity, it’s time to rebalance. You may consider pruning your equity exposure progressively, using STPs to divert flows into a debt fund. This is also the time to rebalance your exposure to mid and small cap funds in favour of large cap ones. Saurabh Nanavati, Chief Executive Officer, Religare Mutual Fund says, “Get your financial planning done with a certified financial planner/adviser and stick to the asset allocation”.

3. Exit: If you need your money within the next two or three years, you should aim to preserve the gains that you’ve already made. You would do well to plan your exit in a phased manner using Systematic Withdrawal Plan (SWP), to minimise the risk of bad timing.

End Note

As Sandesh Kirkire, CEO, Kotak Mutual Fund says, “Investors must remain true to their investment objective, and the consequent investment design flowing from it. Therefore, any event must not be the determining factor in changing your long sought out strategy”.

Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/Life-beyond-20000-Invest-carefully/articleshow/6633053.cms

Mkts strong: What should be your investment strategy now?

The markets have had a remarkable week, the Nifty has hit 6,000. That’s almost now close to the highs that we have seen, the all time highs. So, that’s a very crucial figure that it has hit.

The markets have been on a bull run, we have seen quite a good run up in stock prices. What really should you be doing at this point of time, if you have already invested or if you are intending to invest?

In an interview with CNBC-TV18’s Vivek Law, Anup Bagchi, ED, ICICI Securities says if one is already sitting on profits, it is a good thing to take some profits out.

He further says if one wants to invest at this point of time, he/she should not invest in a lump-sum manner. “Pick your stock, divide it into four or five or six parts, may be every week you invest and average it out or every day you average it out or every month you average it out.”

Here is a verbatim transcript of the exclusive interview with Anup Bagchi on CNBC-TV18. Also watch the accompanying video.

Q: Increasingly given the manner in which the market has run up, we get calls saying is this the right time for me to invest and of course at the same time you get calls for somebody who is already invested for a fairly long period of time, that is it the right time for me to sell. I know that this is an answer which would depend from stock to stock, sector to sector, but, overall, what is your view of what should a retail investor be doing at this point of time?

A: We also are getting lot of both kind of calls. Two things, the good thing is that most of the retail investors for whatever reason while they have not participated too much in the rally, but they have not got off the trade either. So, people who have had stayed in the market continue to stay invested in the market. For them, a little bit of profit taking could be good because markets are running on three fundamental factors, one is the economy doing well, is the sector doing well, is the company doing well, which is more specific.

Second one is on the valuation. Okay if it is doing well, at what price does it become better or at what price does it become out of reach, which is a valuation factor. And the third factor really would be the momentum factor, which is, is it being driven by liquidity or is it being driven by fundamental and because the valuation is very attractive.

I must confess that I would put 60% weightage right now on momentum, 30% I would put on fundamental factors and only 10% on valuations. Valuations from rich have only become richer. Fundamentally, of course, it is supporting, but large part of this movement and these sharp movements have happened because of gush of liquidity that has flown into the Indian markets, particularly by foreign institutional investors (FIIs). The domestic institutions don’t seem to be buying that much. They do not even have that much of liquidity to buy into the market. So, this is largely a very liquidity driven, momentum driven rally.

So what should one do? If one is already sitting on profits, it is a good thing to take some profits out and put it in debt instruments as well because interest rates are also luckily quite attractive. Good quality fixed maturity plans (FMPs) are coming from the mutual fund. So, they can put in there.

Clients who need to invest or who want to invest at this point of time, one really doesn’t know whether the market is going to go too much up or whether it is going to correct because it has already run up quite a bit. So, what we are suggesting to them is you must be invested in the market, but at this point of time do not invest in a lump- sum manner. That is if you have got a lakh of money to invest, do not go and jump one day and get overly excited and invest all of one lakh in one day. Pick your stock, divide it into four or five or six parts, may be every week you invest and average it out or every day you average it out or every month you average it out. But essentially get into the systematic investment plan not of the mutual fund type, but of the equity type, if you figure out that this is the stock that I need to buy. That way one will be able to average, one will be able to get the benefit of not timing the market or not trying to time the market and a benefit of a slightly long-term investing and getting the benefits of both upside and if there is a correction on downside as well. So, that is a generic thing.

Q: I am a new investor entering the market, would it be a safe bet to start with oil and gas sector?

A: I would tend to agree that when you do your first few investments, up to 70% should be in largecap diversified where you get an overall benefit of the market, 20%- 40%, from time to time you can take sectoral bets. There I would say that it might be a better idea to put part of it, 60%-70% in the largecap diversified funds, so that if the markets tend to move up then you get the benefit of the overall movement of the market.

Coming to oil and gas sector, I think oil and gas sector is a policy bet. We all believe that all these companies, all the PSU companies are very strong, they are very asset rich, they are very well run and this is more of a policy bet and that if reform comes then it will start to do better.

Within oil and gas sector if you have some knowledge and if you have done some reading in oil and gas sector, if you were to pick up a stock, I would still say that GAIL could be the better of the stock because I don’t think you will be able to diversify too much between oil and gas sector. But I would say first 70% of your money, whatever is the money, try and invest it in the large cap diversified. Thirty percent if you want to get a sense of stock market, in oil and gas sector you can invest with the stock that I am just suggesting.

Source: http://www.moneycontrol.com/news/market-outlook/mkts-strong-what-should-be-your-investment-strategy-now_486847.html

‘Infrastructure stocks, a good bet' CIO-EQUITY, ICICI PRUDENTIAL MUTUAL FUND

The market does offer pockets of opportunity such as infrastructure stocks, where money can still be made. However, investors should not make any sudden shifts in their allocation to equities, cautions Mr Sankaran Naren, CIO- Equity, ICICI Prudential Mutual Fund, when Business Line spoke to him about the Sensex at 20,000.

The Sensex has hit 20,000 again and there is a lot of scepticism about the markets holding up at these levels. Normally markets never correct when everyone expects it to! What are your thoughts on this?

In the Indian markets, there are two types of investors — locals and foreigners. Yes, the locals are very sceptical about the markets and valuations because India is the only market where they invest.

We can afford to be sceptical! The foreign investors don't see growth in their home markets, and thus, find Indian stocks with their strong growth potential, attractive. Local investors have not invested in the markets and local institutions have been consistent sellers in this rally.

You must understand that mutual funds sell only if they have an outflow from their retail investors. We don't operate like hedge funds! In our case, the outflows have been small. However, the industry-wide outflows must be significant, given the consistent domestic institutional selling in stocks that we have seen over the past few months.

One clear theme driving this rally has been domestic consumption. The sectors leading it were consumer durables, to automobiles to FMCGs. What's your take on those stocks now?

I think infrastructure should be the driving theme for India. If you compare China and India, the consumption part of GDP is lower in China and is higher in India. China has a current account surplus while we run a deficit. If you see infrastructure bottlenecks, it is in India that we face them to a large extent. That makes a case for playing the consumer theme in China and the infrastructure theme in India, while the reverse is happening! I think as we approach the retail consumption season with festival sales and so on, this would be cyclically the appropriate time for the consumption theme to peak out.

The ICICI Pru Infrastructure Fund has managed a five-year return of 25 per cent, but has underperformed diversified funds in one year. What's the argument for investing in infrastructure stocks now?

That makes it a good time to invest in the fund. There is a big gap between what has happened on infrastructure and non-infrastructure stocks. Look at the stocks that represent the infrastructure theme; the theme has been a substantial underperformer. Whether you take power utilities, capital goods or even construction stocks they have all underperformed very sharply. If you look at the non-infrastructure space, whether FMCGs, autos, pharma or technology that is where all the outperformers have come from.

Here, consumer stocks have also moved to a premium over the market while infrastructure stocks have seen valuations correct significantly. If you had to invest now, this makes infrastructure a good bet. Valuations in the sector today are much more comfortable than valuations of sectors that have led this rally. I think Indian infrastructure stocks benefit from the fact that demand potential is so high. In the US, for instance, power utilities are dividend yield stocks. In Europe, again, such stocks are not growth plays.

Are infrastructure companies delivering the expected earnings growth?

One factor that is acting against short-term earnings for the sector is the fact that we have had a good monsoon this year. A bad monsoon aids construction activity but a good one leads to a seasonal disruption. This is reflecting in the quarterly numbers. But it does not in any way alter the outlook for the infrastructure sector. We think the period from 2011-2014 will see an infrastructure-oriented cycle.

Another factor is that infrastructure spending is now being driven to a large extent by the private sector and not just by government. If you break it down, power generation capacity is now being driven mainly by the private sector. If you take roads, you have a fair number of projects happening through BOT route. In ports, a number of projects are coming in through the public-private partnership route.

The earnings growth for Indian companies over the past two quarters has not been too high, the earnings for the CNX 500 companies, for instance, has grown only in the single digits. Is that not a risk to the current valuation of 23 times for the market?

The problem is that market valuations have really climbed and stocks have become more expensive. Expectations have risen to a very high level and those expectations are barely being met by earnings.

There is also divergence, where some companies are meeting those expectations while others are not. The problem about valuations is that we cannot today say that Indian markets are cheap. They are expensive relative to rest of the world. For this valuation to sustain, the results have to be good and the GDP outlook has to remain good. If you look at where we were six months ago and where we are now, there is risk. On the positive side, food inflation is not accelerating any more and the monsoons have been good.

What explains the surge in FII inflows in the past month, where over $3 billion of funds has come in within a month? Is it the upward revision in GDP outlook which has made the difference?

In my view, there has been a growth scare in the Western world and a growth scare in China as well. Consequently, all the growth-oriented money has come to India. That has, however, resulted in a situation where the Indian market is no longer cheap. Certain segments such as infrastructure may be cheap, but not the market as a whole.

A lot of the recent inflows into Indian markets are said to originate from passive Exchange Traded Funds who are only chasing the index. Do you thus, see the gap between index stocks and other stocks widening?

I am not sure if that is entirely correct. If a good portion of that money was ETF money then why would we see such a big sectoral deviation in performance? And it is not as if only benchmark stocks have performed. Even smaller stocks within the consumer theme have performed. The advantage with large caps is that they are less dependent on how interest rates pan out. Small and mid-caps are vulnerable to interest rate risks, especially in infrastructure stocks.

We believe interest rates will peak over a six-month period and then one can move from large caps to mid-cap stocks. You are also approaching the busy season in credit, with activity in the short-term money market peaking in March each year.

If retail investors have lost out on this rally, what should they do now?

I would suggest three things. Investors should look out for pockets of opportunity such as infrastructure stocks, which remain attractive. They should invest through systematic investment plans. And they should not make any sudden shift in their asset allocation towards equities.

Source: http://www.thehindubusinessline.com/iw/2010/09/26/stories/2010092651171200.htm