'Future policies will favour mutual funds'

Q&A: Milind Barve, MD, HDFC Asset Mgmt

, managing director of HDFC Asset Management Company, which has Crisil's Fund House Level-1 rating, sees the mutual fund industry attracting the attention of policymakers in the future. In a chat, Barve adds that the equity market will see more returns from mid-cap companies. Excerpts:

What is the future of the mutual fund industry?
I see a bright future for Indian mutual funds. Internationally, provident funds and pension funds are managed by fund houses. The Indian mutual funds will soon begin to manage the new pension funds. In the near future, about 55 per cent of the total market capitalisation (m-cap) is estimated to be with promoters, 22 to 24 per cent of the m-cap will be with foreign institutional investors (FIIs) and mutual funds and domestic institutional investors' share will be around 8 per cent. FIIs are still the second largest investor class in the Indian market, while globally, mutual funds are the largest. I believe this trend will emerge in the country too. One can expect the future policy direction encouraging mutual funds, which can also result in their market share rising.

Where is the equity market heading?
I think the market sentiment in the medium to long term is very good. In the short term, it may be volatile. But I am certain that the focus will once again shift to the mid-cap segment. Our study shows that from January 2003 to September 2005, mid-cap stocks rose faster than large-cap stocks. Since then, the rise of large-cap stocks is faster. We believe this happens in phases and large-cap stocks will continue to give higher returns in the coming quarters. That is why we came out with a new fund, which is for the mid caps after 15 months. The market will re-rate the mid-cap companies, which, by definition, are those with m-cap between Rs 500 crore and Rs 9,000 crore.

Why is your fund house lagging in terms of assets under management (AUM)?
We are at number four in terms of AUM. We believe size is equally important, but we also balance it with profit, which we can reinvest in the business. We want to grow with more retail participation and genuine third-party investment. We are opening more branches to get better retail participation.

We currently have 33 branches, will be increased to 75 by the year-end. Most of our offices will be in tier-II and tier-III cities, where we think we need to concentrate.

Would you tell us about the new products you are planning to launch?
We will be introducing a gold exchange-traded fund, where investors can get physical delivery of gold, if they opt for, as they exit the fund. Unlike shares, people want to have gold in their possession. We are also introducing a prudent dynamic fund, a first of its kind in the country, where the equity component of investment will keep changing depending upon market conditions. We are also launching an arbitrage fund and another fund, with a part of the corpus invested in equities abroad.

Real estate mutual funds are in the news for a long time now. When will they see the light of day?
We may not have to wait long for that. It is the right time for such funds as proper risk management and exposure norms are now in place. The Association of Mutual Funds is providing the necessary inputs to the Sebi, which will come out with detailed guidelines for such funds.