We believe the gains in 2018 could be relatively more modest as compared to 2017

After some nervousness about valuations and concerns of growth slowdown due to demonetization and GST roll-out, the Moody’s upgrade was reassurance for many investors with regards to domestic equity. For the benefit of Advisorkhoj readers, please explain the significance of Moody’s upgrade for equity investors in India?

We believe that the significance for equity markets comes from a likely improvement in sentiment towards India and its growth outlook, especially in light of the recent growth challenges. It also signals an affirmation of the Government’s fiscal consolidation policy and its reforms, again leading to better sentiment towards India especially amongst FIIs.

By the time this interview is published, the US Federal Reserve would have announced its monetary policy. What will be the impact of Fed rate hike, whether today or later, Indian equities?

The December rate hike is widely expected, more important would be the tone of the US Fed on future rate hikes. It would signal hardening of bond yields and the US Dollar. From the Indian perspective, bond yields could rise sentimentally and the rupee could weaken slightly and this could have an adverse impact on inflation going ahead.

We saw strong momentum in equity market this year (2017). Do you see the momentum continuing in 2018? What is 2 to 3 year outlook on Indian equities?

We believe the gains in 2018 could be relatively more modest as compared to 2017. Over the next 2-3 years we have a positive outlook on the market on the back of a pickup in economic growth and better corporate earnings growth.

Principal Tax Savings Fund is not as popular as some of its peer ELSS funds. But the performance of your scheme in the last 12 months has been outstanding, outperforming the Nifty / Sensex by a wide margin. Even the last 3 to 5 year returns have been quite good. For the benefit of retail investors among Advisorkhoj readers please describe some salient features of this ELSS fund that make it attractive for investors looking for both tax savings and capital appreciation?

Our ELSS Fund is managed as a multi-cap Fund with a mix of Large, mid and small cap stocks. Currently large cap stocks account for around 53% of the portfolio, mid-caps about 19% and 26% in small caps and the rest in cash. Since investors tend to have at least 3 year view when investing in ELSS funds, we believe the multi-cap approach makes sense. Our bottom-up approach to portfolio construction fits in well with this strategy of identifying good opportunities within the mid and small cap space - companies with strong growth prospects, dominant or niche players in their sector and trading at attractive relative valuations. This approach has worked well and we could identify stocks in diverse sectors such as Cement, Auto & Auto Ancillaries, Chemicals, fertilizers, Aviation, Industrials, Financials, take a long term view and hold them till our investment hypothesis plays out, this explains why our performance has been very good. We have seen inflows in several of our funds and hope to see our ELSS fund also to get good inflows over the next few months.

Midcap stocks have outperformed large cap stocks in the last 3 years. You have sizeable allocation to midcap stocks (nearly 45%). Are you worried about midcap valuations? Do you expect to find enough attractive investment opportunities in the midcap segment going forward?

Valuations are definitely a concern in mid-cap stocks in the sense that they are well above long term trends but not in a bubble zone as feared by many. Our focus currently is to revisit our investment hypothesis in mid-cap stocks and make sure that the outlook for FY19 and FY20 is as per our expectations and hold on to those which are on track notwithstanding possible volatility in the near term. We are not chasing momentum nor are we chasing stocks at any valuations just because of growth. We do find some interesting opportunities still but definitely not as many as we had some months ago, in that sense, we are bit more selective.

You have HDFC Bank, ICICI Bank and State Bank of India among your Top 5 holdings; banking and finance comprises a sizeable chunk of your portfolio. What are views and long term outlook on the banking sector, both private sector banks and public sector banks, especially in the context of the Government’s and RBI’s efforts to recapitalize and reform this sector?

We believe that the retail business of banks would continue to see good growth on the back of growth in consumption, earlier urban but now rural too would pick up. The corporate loan business has still some pain left in terms of resolution of stressed assets and some provisioning requirements. However, if one takes a 2-3 year view on the banking sector, we have a positive outlook on the sector since we expect loan growth to revive and the asset quality problems would have been settled by then.

Based on our experience, many financial advisors usually recommend “popular” ELSS funds to their clients. We have a large number of financial advisors among our readers in Advisorkhoj. Please share your views on the different performance parameters financial advisors should look at (especially for ELSS) when recommending funds to their clients?

For ELSS funds, it would make sense to focus on the long term track record of the fund from a returns perspective. I personally would worry less about volatility of the fund as long as the returns are commensurately better, since ELSS funds are for the long term investors. It also makes sense to look at multi-cap ELSS funds, since long term returns could be enhanced through mid-cap exposure. Relatively low portfolio turnover would be a good indicator of Buy & Hold strategy, which makes imminent sense for long term funds.

Some investors want to invest in ELSS funds for 3 years, while others want to invest for a longer period of time. What is your advice for investors looking to save taxes and seeking capital appreciation at the same time by investing in ELSS?

ELSS funds make perfect sense for precisely that.... save taxes and get long term capital appreciation. Staying invested for longer periods than the lock-in would be even better if investors don’t need the funds for any alternative use.

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The views expressed and information herein are independent views of the interviewee and for informative purpose only and under no circumstances should be construed as an opinion or Investment advice. The information contained herein is not intended to be an offer to seek solicitation for purchase or sale of any financial product or instrument. Investment involves risk.

As an investor you are advised to conduct your own verification and consult your own financial and tax advisor before investing. The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained herein.

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