Staying away from mid, small-caps not an option: DHFL AMC CEO Ajit Menon

Domestically, market indices are quoting at a premium to their historical averages but the premium currently is not very high, says Menon

The fall in global liquidity with the end of restriction on money supply needs to be watched closely, says Ajit Menon, chief executive officer of DHFL Pramerica Mutual Fund. In an interview with Ashley Coutinho, he says valuation of indices are at the current levels due to extreme overvaluation in certain pockets but not all segments are at historical highs. Edited excerpts:

What is your outlook on the market for the year ahead?

Our local micros are improving, headwinds in the form of challenging macros are transforming into tailwinds. But the other phenomenon that needs to be watched carefully is the impact of the waning global liquidity with the end of curbs on money supply. 

Domestically, market indices are quoting at a premium to their historical averages but the premium currently is not very high as it was in the beginning of the year. Also, valuation of indices are at high levels due to extreme overvaluation in certain pockets. Not all segments are at historical highs. Even today, there are opportunities that offer a decent possibility of wealth creation in the long run. 

What is your view on mid and small-caps as investment bets? 

Staying away from mid- and small-caps is not an option. The allocations should be decided based on the overall asset allocation. Though mid- and small-cap indices look expensive, there are quite a few good investment opportunities in the space after a correction in valuations. Capacity utilisation has significantly improved, balance sheets are now deleveraged and quality companies will benefit from the operating leverage.

What bearing will the general elections have on the market?

Closer to the elections, the markets tend to witness volatility. From an investor’s perspective, it is important to remember that markets have moved around 11 times from their lows in the year 2000. During these 18 years, we have seen three general elections and numerous state elections. 

Over the years, what we have seen is that the economic policies of major parties are broadly on similar lines. So, investors should use the volatility to add to equities from a long-term perspective if their asset allocation permits.

Mutual funds have seen sizeable inflows this year. What changes do you foresee as the industry grows in size?

Manufacturers will have to move away from product focus towards solution orientation. A product or a combination of products will ultimately have to come as a challenge for an end investor to make the manufacturer relevant in a competitive market.

Solutions could include age-linked asset allocation facility that helps create a customised path to retirement. The financial intermediaries will rely more on value addition through holistic planning for the accumulation as well as the distribution phase along with leveraging technology to create ease of transacting. 

Amtek Auto and IL&FS went through troubled times and a lot of fund managers were caught off guard. Have fund houses stepped up diligence in assessing debt papers?

There is always room for improvement. However, episodes like Amtek and ILFS need to be viewed from a different perspective. Over the last 6-7 years, we saw a large section of the banking industry face the challenge of rising NPAs due to defaults across various industries. During the same period, despite large growth in assets of the MF industry, there were only few isolated instances of defaults for MF schemes. The industry, especially the fixed income managers, need to be complimented for evolving robust processes that to a large extent have a safeguarded investor interest.

Sebi recently reduced total expense ratios for mutual fund schemes. What is the overall impact of this move?

The industry was by and large sticking to Association of Mutual Funds in India’s (AMFI’s) guidelines restricting commission payouts in accordance to the mandated expense ratios. A move that can have a bigger impact is the banning of upfront commission. 

The new financial dynamics with trail commission will mean a substantially longer payback period/break even for new entrants into the advisory business. This could work in favour of existing distributors. It would be interesting to see if some segments of distribution shift focus on products with upfront payouts and the extent of shift. 

For manufacturers, it is business as usual. Having a level-playing field across products would be best and we will probably not have to wait long as regulators take steps to ensure that consumers don’t lose faith in the industry. 

Sebi recently introduced norms for categorisation of schemes. Do you think this is the right step? 

Yes. When efforts are being made to increase retail penetration of MFs especially beyond top 30 cities, it is important to have standard definition. The categorisation reduces the possibility of mismatch between the investors’ expectations and product attributes. Despite the framework for each category there is enough leeway for fund managers to operate. In case of a focused fund, the scheme can have maximum 30 stocks. However, it is up to the fund manager to decide whether it should be large cap oriented, midcap oriented or a multicap fund.