ELSS schemes tend to only attract investors looking for tax saving. What needs to be done to attract a wider range of investors in ELSS?
ELSS as a category as compared to diversified equity funds has underperformed. Fund managers have a benefit in ELSS because of the three-year lock in period. The industry needs to ensure that ELSS funds perform on par if not better than diversified funds. ELSS has two benefits – relatively better returns as compared to other tax saving instruments and tax benefits. This category should be promoted among the masses. If ELSS lives up to their expectations, then a wider category of investors will start investing in these funds.
Do you think ELSS gets its fair share of investments from investors considering there are other competing products under the 80 C category?
Only a small amount of tax saving money is going in ELSS. But I do believe there is a slice of pie available for all products.
Which themes/sectors would you consider for building the ELSS portfolio?
Our economy is at the cusp of revival. Our economy has three major advantages at this time. Firstly, raw material prices have come down drastically and India is an underinvested economy. So whatever infrastructure we build now will be more competitive than what is built in China and any other country in the last 15 years. This gives us a long term competitive advantage. Secondly, the government’s Make in India initiative will make our economy very competitive. Thirdly, there is a sifting of black money into white money.
The economy is growing faster than what we anticipated. This will increase the purchasing power of consumers. The direct cash subsidy combined with lower inflation is increasing the purchasing power of money. This is what we are trying to capture in our fund, DHFL Pramerica Tax Savings Fund, which may give returns to investors.
While it will be a diversified portfolio, currently our bias is towards companies which will benefit from investment led growth like construction, infrastructure, financers, equipment suppliers, etc. Also, we are bullish on export related companies that are exposed to dollar because the rupee is appreciating against all other currencies except dollar.
Mid-cap funds topped the performance chart in 2014. In which pockets are you seeing opportunities in the mid cap space at this juncture? What kind of returns we could expect from mid-cap funds this year?
We are in a bull market. We will not only see positive surprises in earnings for the next two years but we will also see PE expansion. In times like these, you see the emergence of many new companies. A lot of companies which are currently struggling will just fade. Mid-caps have seen substantial outperformance. The CAGR corporate growth could be in the range of 25-30% in the next three years. Going ahead, I can say that these funds may outperform the market.
Have you invested or planning to invest in any of the IPOs hitting the market?
We have participated in 30% of the IPOs which have hit the market in the last one year. We avoided a majority of IPOs because the pricing was very aggressive, which didn’t leave much scope for us to make money.
Would you invest if an e-commerce company were to come out with an IPO? What would be the parameters you would look for before investing in an e-commerce firm?
When we talk about e-commerce we tend to think only about the companies in that sector, however, E-commerce encompasses a broad chain of companies.
We expect that manufacturers themselves will start selling their products online. It is a new medium of doing business. The implications of this is that consumers are benefiting and intermediary’s margins are shrinking. If consumers are benefitting, then we expect that in the next three years, India will have an e-commerce market of $20-30 billion.
There is no loss of margins for manufacturers for products which have a pull. Also, companies involved in supplying goods to consumers will also benefit.
To give you an example, there were thousands of IT companies which started during the IT boom in 1995. By 2000-01, only a few survived. So one need to only buy IT companies but also look at ancillary companies. The same logic applies to the e-commerce space.
How do you see the e-commerce disruption affecting financial services companies?
Banks were getting CASA at a very low cost. With the emergence of payment banks, small banks, etc., the cost of funds for banks will go up. To maintain margins, the financial services industry has to become efficient buy cutting costs. I think digitalizing will play a big role. Banks won’t be opening too many branches. The financial services industry will grow in a big way but the players will change. There will be new winners. The disruption is bound to come but it will be beneficial.
By when do you expect the benefits of rate cut to be visible in corporate earnings?
It is a myth that rate cut brings about growth. There is no growth in some economies despite having low interest rates.
There are two types of rate cuts. The interest rates which is being discussed in global markets is to protect their economy from decelerating further. What the central bank in India is doing is different. We are focusing on trying to control inflation and reduce the risk premium for the Indian economy. When the risk premium decreases, the real rate of return goes down.
There are two types of companies – good companies with no debt and highly leveraged firms. Banks are not ready to lend to companies which are highly leveraged. So such companies will not benefit substantially from rate cuts.
But there can be an indirect impact of rate cuts. The cost of capital for companies goes down. If the cost of capital goes down, the IRR of every project in the economy improves. This leads to increase in investments, which ultimately improves capital inflows in our economy. So we will see the impact of rate cuts on growth in the next one year.
What are the three key triggers for the market at this juncture?
We are waiting for a pickup in money supply in rural economy. It has slowed down due to inadequate rains. We believe the direct cash subsidy will improve the money supply.
The second trigger is cost of capital, which is now coming down.
The third trigger is global stability. Countries like Brazil, China and Russia are still struggling and their currencies can create a significant negative impact for the rest of the world. If the global situation improves, money will start chasing India.
What have been your notable mistakes and what did you learn from them?
As fund managers we tend to think that we are different. We assume that what has happened in the past will not repeat. The world goes through cycles. So there is lot to learn from the past and act accordingly. Things are not going to happen exactly as what happened in the past but they do follow a pattern. We tend to think we are immune. You need to take out emotions from investing.
Your favorite book and why you would recommend it to others?
My favorite book on investment has got nothing to do about investments. The book is Bhagavad Gita. It allows me to be dispassionate about the things I do. It says that focus on your work and don’t expect any return because the result is bound to come. In investing, if you are not so bogged down with the outcome, you tend to take dispassionate decisions. I read this book every day.
DHFL Pramerica Tax Savings Fund
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