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  • We have benefited to some extent with higher interest rates

    Raj Mehta's interview in The Economist's Zone, September 13, 2018

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    The original article could be seen here.

    Raj Mehta, PPFAS Mutual Fund


    1. Net inflows into domestic equity mutual funds fell 11.4 percent month-on-month to Rs 8,375 crore in August. what can be the possible reasons behind it besides profit booking? What are the expectations in coming months?

    2. The flows have cooled off a little bit since January 2018 given that last year was a very high base. Most of the inflows last year was in the mid and small cap category funds. These funds have given abnormal returns in 2017 and some profit booking had to happen. However, if you look at the SIP book of the mutual fund industry, it is at its peak at about 7,600 crs. SIP flows are really sticky in nature and also good for the investors to ride through the up and down cycle of the market. I expect the domestic inflows to be strong in the coming years as a lot of financialisation of savings is happening. People are moving more and more towards financial assets given that there has been absolutely no return in physical assets like gold and real estate. Compared to the world, Mutual fund industry in India has a very low penetration and a huge scope ahead.

    3. What is your outlook on Rupee?

    4. It is really difficult to predict the movement in currency in the short term. With the interest rate and inflation rate differential between US and India, the INR should depreciate approximately 4-5% every year over the longer term. However, the short-term movements in the currency may not track this and there may-be short term aberrations.

    5. How has the fall in Rupee impacting returns on mutual funds?
    6. Given that it is difficult to predict the currency movements, we hedge approximately 80% of our foreign portfolio by using exchange traded currency derivatives in our equity fund. Due to the fall in Rupee, the bond yields have gone higher and hence the short duration debt portfolios have seen some down trend. However, given that we only have a liquid fund in the debt category, we have benefited to some extent with higher interest rates.

    7. What is the fund house new strategy in current scenario of falling Rupee, rising inflation, mixed equity market returns?

    8. The fund strategy should not change every few months given the change in macro conditions. Over a longer period of time, all these things don’t matter much and what matters is the growth in earnings and the sustainability of it. We, as a fund house don’t like to take any macro calls and focus on bottom up stock picking. We like companies with good management, sustainable earnings growth & visibility at a reasonable valuation.

    9. What is your outlook on inflation?

    10. Personally, i have been predicting a spike in the inflation before the two rate hikes came in from the RBI Monetary policy committee (MPC) meeting. The RBI MPC views have been a bit dichotomous in the past 1 year where they did not increase the repo rates but predicted inflationary environment in the coming months. Even when the RBI says, inflation is within their limit of 4% +/- 2%, i feel we are seeing some inflationary trends picking up in the economy. I expect one more rate hike in the last quarter of this financial year.

    11. How are you approaching market right now? What is your outlook for the market?

    12. Globally, we have seen a huge up move in the markets since the Lehman crisis 10 years back. This was majorly fuelled by the huge influx of liquidity by Central banks all over the world. This year onwards we will see some tightening from the Fed followed by other Central banks. This would lead to higher interest rates globally and we could see some volatility in the short term. This along with rising crude prices, trade wars, etc may give some opportunities for investors going forward. The mid and small cap valuations have been euphoric and we have seen some correction in them in the past 2-3 months. We feel that the good quality companies are still expensive. We don’t intend to hold this cash for a long period of time or time the market. We are just waiting for good quality companies at reasonable valuations to come our way. We hope to deploy some portion of this cash in the next 6-12 months time frame.

    13. What is your investment space? Any stock specific traits which makes it part of your portfolio? What?

    14. Our flagship scheme has a mandate to invest across market caps, sectors and geographies. We don’t put much emphasis on the macro environment and the associated factors since they are not predictable and not within anyone’s control. We believe in bottom up stock picking where the primary criterion for stock selection are management quality, business with some competitive advantage and availability at a reasonable price. We are a “go-anywhere fund”. As I said earlier, our flagship scheme has a mandate to invest across market caps, sectors and geographies. So we don’t keep a hard rule as to what percentage of the portfolio goes into large, mid and small caps respectively. In fact, we have investments in some mega cap companies as well like Alphabet. We look at a company individually and see if it fits our checklist irrespective of its market cap.

    15. What kind of stocks you avoid, why?

    16. The first and foremost point that we look at in a company is the quality of management. We want to partner with good quality promoters who respect the minority investors as well. The second priority for us is that the company should earn a reasonable return on capital over the cost of capital over a long period of time and across the cycle. So some of the sectors and stocks get eliminated in these two criteria itself. After this, it is usually bottom up stock picking.

    17. How frequently you churn your portfolio and Why? Latest made changes in portfolio?

    18. Our portfolio turnover is among the least in the mutual fund industry. We usually like to own a company for a very long term i.e. 5 years and above. The portfolio turnover for our equity fund is 10-11% as per the latest disclosed portfolio which means that we churn our core portfolio once in 10 years. There are only two situations where we intend to sell a stock. First, when the company’s fundamentals deteriorates either by some capital misallocation or some new competition or disruption coming in or a pricing war in the industry. Second, when the valuations have run far too ahead of its fundamentals and we feel that the valuations are not sustainable for a long period of time.

    19. Money flowing through the SIP route is holding up. So, should the investor only go for SIPs?

    20. Whether an investor should go for SIPs only or lumpsum depends on the risk appetite and the cash flows of a particular investor. However, what SIP does is smoothen the volatility curve and average the cost of the investor. SIP is a very disciplined way of investing and once implemented, it should not be tinkered with every now and then.

    21. Given the dynamic economic and political situation, how can investors minimize their risk and maximize their returns?

    22. The path that we have selected to reduce the risk is geographical diversification. We not only have US companies in our portfolio but also some companies based in other countries like Nestle and Suzuki which have their ADRs listed on the US stock exchanges. We have taken a conscious decision of not taking any call on currency movements and hence we hedge approximately 80% of our underlying foreign portfolio position through exchange traded currency derivatives. Also, there are some foreign technology companies for which there is no comparable in India. For instance, Alphabet and Facebook command a major share of the digital advertisement pie globally. If you want to participate in the trend of digital media & marketing, then you have no investable idea listed in India.

      The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and PPFAS Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of PPFAS Mutual Fund.
    Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully..

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