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'Important that people invest systematically'

Tanvi Varma/Money Today | Print Edition: November 2011

Milind Barve, Chairman, Association of Mutual Funds of India (AMFI), speaks to Tanvi Varma on the industry's future and the current maket scenario.

AMFI recently launched a new campaign to promote mutual funds. What is the objective of this investor awareness campaign?
Literacy levels In India are low and financial literacy even lower. So, the opportunity lies in not getting more money from existing customers but to start telling prospective investors about different savings and capital appreciation products.

A part of the theme in the ad is that saving regularly pays. An important message of the campaign is, "Ho sake to har mahina bachat karo," putting emphasis on disciplined investing. The campaign also tries to tell investors to check out the various fund options that are available.

The third message is that investors should visit a financial advisor. It is very important to invest systematically with proper guidance.

Considering the current economic and financial environment, within India as well as globally, should one alter his investment strategy?
There is consensus that the current economic and macro environment is more complex than in 2008. Nobody knows what exactly is the problem or the solution. We have to wait for things to unfold. India's GDP growth model is fairly domestic-driven and less dependant on global growth.

But, our financial markets are dependent, considering that the foreign money that comes in and goes out affects prices. Apart from fund flow, global market news affects our markets even though the events have no correlation to the Indian economy. Having said that, one should look at the larger picture, that is, our GDP growth is a secular 7.5-8%, and strong compared with the rest of the world.

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Therefore, in the long run, equity as an asset class will give superior returns, barring the unpredictability at the short end. Further, with tax benefits, the entire return over a period of five years is totally tax-free. Therefore equity should have a place in everyone's asset allocation, with the percentage varying depending on financial goals.

When should one invest?
Do not buy at the peak and sell at the bottom. Now, this is relative to past performance. One should look at the long-term PE multiple. For instance, in India, the long-term PE multiple has been 18x earnings, and currently we are trading at 12x-13x 2013 earnings, indicating we are closer to the bottom.

When we move towards 20x earnings, we are above the long-term average and hence on the expensive side. Investors have also become wise. Data suggests that when the markets came down, the industry sees positive net sales. The average inflow and outflow is 1-2% of the total monthly equity assets under management (AUM). The AUM of equity schemes are about Rs 2 lakh crore and a change of Rs 2,000 crore is not much.

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There are more than 65-70 lakh SIP and STP transactions every month, with Rs 1,700 crore coming in. In fact, even the average period is longer now, that is, four-five years compared with one-two years earlier. The average SIP amount is Rs 2,000-2,500, which shows that small investors are investing systematically.

Do you think we are likely to see more pain in the market?
The core of any market is the macro and micro environment. The macro environment includes the various deficits, fiscal, revenue or current account, whereas micro is what happens with individual companies.

Currently, we are dealing with headwinds on the macro front, although we don't doubt our ability to deal with it. Corporate earnings have varied from sector to sector. Although our growth model is not shaken by events unfolding outside India, it impacts the cash inflow due to risk aversion. We will always remain vulnerable to international events.

What is your view on interest rates? Have they peaked? What are the best debt options now?
There is fair consensus that we are close to peak interest rates. We will benefit from lower commodity prices, such as of crude oil. However, supply-side constraints, which have caused higher inflation, are not easy to tackle.

Investors have to be careful while buying medium- and long-term debt funds. They should put their money in liquid plus or liquid funds, which have low liquidity and credit risk. They're giving returns of about 8.5%, but may lose tax benefits in the proposed direct taxes code regime.

However, if you do invest in a particular way you could get indexation benefit. Idle money in savings account, earning 3.5%, can be invested in these funds, from which one can potentially earn a 5% higher return with fairly low risk. FMPs are also good options since yields are currently high.

In terms of products, do you see launches of more global funds or silver ETFs?
I don't think there will be lot of funds to invest globally. The industry is trying to raise foreign money coming into Indian markets. We don't know if it will come in the form of new products. I do not back the launch of new products. The most important virtue of a product is simplicity. When we talk about lack of awareness, we cannot launch complex products.

(Milind Barve is also MD, HDFC Mutual Fund)

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