AIFs could become a large asset class in coming years

India’s gross domestic product (GDP) is expected to be $4-4.5 trillion in 5 years. And with a multiplier of 0.8-1.2x, the market cap will be anywhere between $3.5 trillion and 5 trillion. Thus, lot of wealth will be created especially where companies move from small-cap to mid-cap and from mid- to large-cap in 5 years or so, said Viraj Mehta, managing director, Equirus PMS, in an interview with Ritwik Mukherjee. However, Mehta sounded a word of caution. With general elections round the corner the fiscal discipline, achieved so far, might be hampered a bit especially in the light of rising crude environment. Thus the rupee might be a bit volatile and market participants may choose to hold back their chips making markets a somewhat choppy for coming few quarters, said Mehta. Excerpts:

What’s your view on the Indian economy and the capital market with the festive season just 2-3 months away and the general elections are due next year?

The economy is gathering momentum with the effects of demonitisation fading away and GST (goods and services tax) settling in. Demand is robust across segments and green shoots are being seen in capex. Capital goods companies have seen substantial pick up in ordering with order book visibility of more than a year. With general elections less than a year away, it also reflects that the capitalists are quite confident about the economy as a whole. But it is difficult to predict where the stock markets will be over next 3-6 months.

What are your main concerns about the current market?

The major concern is the ability of public sector banks (PSBs) to grow their loan books. With PSBs having more than 65 per cent share of total advances, working capital funding especially to small and medium enterprises (SMEs) and micro, small & medium enterprises (MSMEs) is being stifled.

The government has done a good job of maintaining fiscal deficit for the last 4 years. But with elections close by this discipline might be hampered a bit especially in the light of rising crude environment. The rupee might be a bit volatile and market participants may choose to hold back their chips making the market somewhat choppy for coming few quarters.

How are institutions/FIIs looking at India now?

India continues to be the bright spot in the world economy. India should be able to grow at a healthy rate for many years to come. With that kind of visibility, the market should be able to compound capital at 12-13 per cent for a long time, also with a fair share of volatility.

Do you see opportunities in the current market?

Even though the Sensex and the Nifty have hit their all-time highs, returns have been driven by a handful of companies. Also, the market has seen a substantial correction in last few months. Broad markets especially small- and mid-caps have corrected significantly irrespective of their quality. There are attractive opportunities in the market in these small and mid-cap companies, although selectively. Large-caps seem to be fairly valued.

How do you see the next phase of mutual fund growth in the country? Can mutual funds help to reach financial goals?

Per capita GDP in India is very low. We expect this number to grow well in the next decade. Also, most of the household savings are locked up in unproductive assets. Financial assets form only 7.5 per cent of household assets. We believe this percentage will rise substantially as the population gets more educated and understands the importance of financial assets. Mutual funds will play an important role as these two legs of growth play out in the market.

Where do you see the alternative investment funds (AIF) industry in India two-three years down the road in terms of investments?

AIFs are very attractively poised. They are a pooled vehicle with flexibility to structure the fund in various ways with mix of asset classes and a mix of long/short investing strategies. Mutual funds and portfolio management services (PMS) don’t have this kind of flexibility. AIFs can be a specialised vehicle especially for high net worth individuals (HNIs) suiting their requirements. A fund manager also has the ability to create innovative fee structures to align their incentives with that of investors. With all these advantages, AIFs should become a large asset class in coming years.

Where do you see the Indian capital market five years down the road? Would you like to put any number for the Sensex in 2018/2019?

Indian GDP will be around $4-4.5 trillion in the next 5 years. With a multiplier of 0.8-1.2x, the market cap will be anywhere in the range of $3.5-5 trillion. Lot of wealth will be created especially where companies move from small-cap to mid-cap and from mid-cap to large-cap in the next five years. But we don’t have any idea where the Sensex will be in 2018/19.

Which sectors you would like to bet on at this point of time?

We are majorly bottom up investors. But we find opportunities selectively in capital goods and home building segments. With the capex in sight, we believe these segments will do well.

How do you pick your own investments?

We are bottom-up investors and use fundamental analysis to make investments. We have no clue about technical analysis.

How should investors handle their investments for the near future? Also, what would be your advice to retail investors?

Retail investors wanting to put money in equities should invest with a minimum time horizon of three-five years. Only that part of the money, which won’t be needed in the short-term, should be allocated to equities. All short-term investments should go in debt instruments. With three-five years perspective, investors should be able to earn a reasonable return from the market.

ritwikmukherjee@mydigitalfc.com

Columnist: 
Ritwik Mukherjee