We believe the strong surge in inflows into Mutual Funds is a structural shift

2017 was a terrific year for equity investors. Do you expect the bull market to continue in 2018? What are some of the factors that could drive the market forward in 2018?

We do not expect 2018 to be as good as 2017. While earnings recovery is likely there are some macro challenges such as inflation pressures, widening deficit etc. which could drive interest rates up. Valuations are not supportive after the massive rally of 2017. All in all we expect high single digit or low teen returns.

Some financial institutions are expecting 3 to 4 Fed rate hikes this year. The Fed rate hike in December 2017 did not have any impact on Indian stocks. Please share your views on the linkage of rate hike and our stock market and also what is your interest rate outlook for India in 2018?

Yields have been rising across the globe and India too has not been an exception. Interest rates have an inverse correlation with equity markets....which means if rates go up, P|E multiples come down and hence so do returns. Typically the first few hikes get ignored by the equity market but if the rates continue to rise then they do have an adverse impact on equity markets as seen in the last few days. We do expect a rise of in interest rates in India in 2018 which in fact has already happened in terms of market rates.

In the past the FIIs have been the market movers in India. However, the last year or so has seen domestic flows particularly through mutual funds dominate FII flows. Is this in your opinion a fundamental shift in the structure of Indian markets and how this possibly can impact the Indian markets in the medium to long term?

We believe the strong surge in inflows into Mutual Funds is a structural shift from physical assets to financial assets and also correction of skewed asset allocation which favoured fixed income so far, but is now seeing some shift to Equities. We expect this trend to be sustainable although the pace of inflows can moderate going ahead. It is a very significant development for the Indian market as it could help keep the market relatively more stable especially during times of FII selling.

Balanced Funds have been the most sought after category in the last two years and incremental industry AUM in this category has been the highest. In your opinion, what could be the main reason for investors to opt for balanced funds?

In our opinion, the reasons could be several......a. New investors preference for a product which offers better returns than fixed income with calibrated equity exposure and hence less risky than pure equity funds b. Given the sharp run up in the market, it was perceived to be less risky than pure equity funds as it was combination of equity and debt.

The fund managed by you, Principal Balanced Fund, has been one of the topmost performing funds in the category and crossed Rs 1,000 Crore AUM mark recently. What was your key strategy which brought the rich rewards for the investors?

We managed it as multi-cap Fund with focus on identifying stocks with strong growth prospects and available at attractive relative valuations. In that sense, it was a bottom-up portfolio construction strategy comprising stocks across diverse sectors, dominant players in their sectors or niche players where we believed market had not priced in the strong growth potential and thus offered good upside.

What would be your investment strategy for this fund going forward now that the market valuations are not cheap?

There is definitely a greater tilt towards large caps and stocks where we believe downside is limited and upside moderate. Notwithstanding the ongoing carnage in mid and small caps, we still have a decent exposure to them where we have great conviction in their growth prospects being well ahead of market expectations.

You are bullish on banking/financial sector as over 15% of the portfolio is invested in this sector. Would you increase allocation to this sector further now that the Government is funding the recapitalization of PSU Banks?

We do see the banking sector offering potential for reasonable returns over the next 2 - 3 years, especially the corporate banks which are on their way out of the NPA mess and which are well.

While the markets are at all-time high, the experts are sceptical about mid and small cap stocks as they are probably trading at the highest level of their respective P/Es. Every expert is suggesting cutting down exposure in mid and small cap stocks. What do you think? Is there still any room for capital appreciation from these stocks?

People are right in worrying about valuations of mid and small cap stocks and that is reflected in the recent carnage in this category in the past few days. Our belief is that while this space would be volatile, stocks which have strong growth visibility and stable Balance sheet would give good returns over a 2-3 year horizon. Accordingly, we continue to stay invested in this category of stocks where our conviction is high.

Balanced funds gave fantastic returns in the last 12 months. Principal Balanced Fund gave over 32% returns in the last one year. What is your advice to retail investors who want to invest in balanced funds for medium to long term (3 years or longer)?

Investors need to peg return expectations much lower. This category should give returns somewhere in between debt and equity funds. If in the long term, equity returns are 4% to 5% higher than fixed income, then a Balanced Fund with 70 pc equity would give 3% to 3.5% higher returns than debt. Whilst this may seem modest, it seems more sustainable and in an era of relatively low interest rates, they can bump up investor returns by 30% to 40% compared to a fixed income fund. The other advice would be to invest for the long term and not approach this category as a source of regular income as that may or may not happen. Finally, if the investor is there for the long haul, do not fear volatility as it is an integral part even for these funds due to at least 65% being invested in equities.

We would like to take this opportunity to thank all our partners who believed in us. Thank you for recommending Principal Mutual Fund to your investors. Here is a small video for you –

Video Link - https://youtu.be/hb3rCsgV63E

Product label:

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. The investment strategy stated above may change from time to time and shall be in accordance with the investment objective of the fund.

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.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.