'Returns should track earnings growth'

Prashant Jain, chief investment officer, HDFC Mutual Fund

The key elements of our investment strategy are as follows:
1) A disciplined asset allocation strategy: Based on equity valuations, interest rates and future outlook, we vary the asset allocation between debt and equity in the ratio 60:40 to 40:60 approximately.

2) Investing in good quality assets: This means investing in companies that are well understood and which have quality management, good corporate governance, strong competitive position and sustainable businesses.

3) Buying 'growth at a reasonable price': The equity investments are focussed not only on earnings growth, but also on the company's valuation. We move out of sectors that are getting expensive relative to their growth prospects.

What are your views on the valuations in the mid-cap segment?

Our allocation to mid caps has been reduced significantly. We are not as focused on size of business as on quality of business. There is nothing wrong with a well managed growing business with competitive advantages even if it is small in size if the price is reasonable.

What is the outlook on equity and debt markets?

The Sensex at present levels is trading at around 16 times estimated 1-year forward earnings.

In the future market returns should track earnings growth. In fixed income investments, returns should largely track running yields.