What changes have you brought about after taking over as the CIO at Tata MF?
We have an excellent investment team at Tata Mutual Fund. I have made some minor changes to the investment process and risk framework.
The postponement of the Federal Reserve’s winding down its stimulus program has provided some relief to the markets. Without any change in fundamentals, what according to you is holding the market at current levels?
In my view, looking only at benchmarks to assess market performance can be misleading. Only select large cap stocks are getting FII and ETF money and they are the one which are holding the indices. Whereas CNX Midcap and Smallcap Indices are on a YTD basis down by 17% and 25% respectively and this probably reflects the real fundamentals of the Indian market. Looking at the broader indices indicate that we are still some time away from regaining the confidence of retail investors.
Would it be a good idea to invest in equities at this juncture?
Timing the market is not advised for mutual fund investors. The best way to invest in equities is through SIP and there is never a good or bad time to invest through SIP. Additionally, the tenure of holding should be long enough to see through the various phases of the market. Irrespective of market conditions, we advise continuation of SIPs.
What strategies have you applied to shield your portfolio (both on equity and fixed income) in these tough times?
In equities we are overweight on companies where there is visibility of earnings and have free cash flows. We are avoiding leveraged companies. We are also overweight on companies which derive their revenues from geographies which are doing better than India. In fixed income we prefer running interest rate risk to credit risk because we think that corporate stress is yet to peak and hence credits can come under pressure.
What would be your recommendation to investors who wish to invest in fixed income funds at this juncture?
We believe that the yield curve will steepen further hence investing in Short Term Funds and FMPs are advisable at this point of time. I think we are 6 months away from a top in the 10 year bond yield and it will coincide with falling inflation. Investors therefore should look to enter long duration funds in the next quarter.
Where do you see the bond yields heading?
I think in the short term 10 year bond yield will probably see a high of 9.50% but that would be a top in my view and anybody entering long duration funds at that time can expect to benefit from falling interest rates.
What are the reasons for the high cash holding (11%) in the Tata Ethical Fund?
The above cash holding was temporary in nature pending deployment and does not reflect a cash position for defensive considerations.
Do you expect that the RBI will further hike rate in its forthcoming policy meet?
We believe that the RBI will hike the rates atleast once, most likely two rate hikes of 25 bps each over next three months. RBI has shifted its focus from WPI to CPI which warrants further rate hikes to anchor inflationary expectation
What is your medium term view on the markets? (1-3 years)
I am very bullish on both equity and debt markets over a 3 year horizon. With a hike in policy rates, banks will have to raise deposit rates which will promote shift of physical savings to financial savings and will help in curtailing spending and CAD. This ultimately will be trigger for a big rally in both equity and bond markets. We expect a scenario of falling bond yields and expanding PE multiples as inflation starts falling and growth start bottoming out.
What is your outlook on the rupee?
I think the worst is not over for rupee. I think after remaining stable for a couple of weeks due to the measures taken by the RBI, Rupee will start sliding again and if substantial diesel price hike is not announced, then I am looking at breach of 70 level by December-end.
Your favorite investment book and why you would recommend it to others…
My favorite book on investing is ‘Reminiscences of a stock Operator’; a 1923 novel by Edwin Lefe’vre. This book is all about investor psychology and is a must read for anybody who wants to be a part of capital markets. Though the book was written long back, the author’s advice on exploiting fear, greed and the herd mentality are just as relevant today as they were then.
