'Returns from debt still not good enough'

How do you read the equity market?

The equity market continues to remain buoyant with excellent corporate earnings reported for the second quarter and continued confidence placed by FIIs in the Indian markets. With crude prices falling, the country having another fairly good year of monsoon rains and the credit policy also having no negatives for the corporate segment, company earnings are expected to be good for the rest of the year. Besides, with the expectations of a GDP growth of 8% for 2006-07 and likelihood of this growth rate being sustained or even improved upon in the coming years, one can expect to have continued growth in corporate performances over the medium to long term. We therefore expect the equity market performance to be satisfactory over the medium term.

People have started talking about stretched valuations? Any concerns as yet?

It is a fact that Indian equities have the highest valuation factors among the emerging markets. However, with such high earnings growth being reported in the last two quarters and a favourable outlook on earnings for the rest of the year, the market should be able to support such high valuations.

Many MF schemes seem to be underperforming the market. Any specific reasons?

The market performances in the past six months have not been uniform over various sectors and segments. In the last six months, small- and mid-cap indices are continuing to significantly underperform compared to the large-caps. Even among the large cap stocks, it has been a few companies and sectors which have contributed to the market growth in this period. As most diversified funds have a blend of large- and mid-cap stocks the returns would be lower when compared with a typical large-cap index.

Do you think retail investors should consider investing in debt funds?

Returns from debt funds are still not good enough to attract investors. Some of the fixed maturity plans, however, offer reasonable return expectations to investors which may be considered taking into account the lower tax incidence on the earnings.

Are close-ended funds good for small investors?

Investments in mutual fund schemes, particularly in equity schemes, should be made with a long term horizon of two to three years. As most of the close-ended schemes being launched now are for periods of 3 to 5 years, they should offer reasonable length of investment opportunities for retail investors. Investors should, however, note the exit options carefully before investing.

What should be every individual small investors’ strategy when it comes to investing into MFs?

Today, small investors have a wide variety of options. Selection of the right funds is important. This should be done taking into account their risk profile and investment horizon. Equity investments should be made with a longer horizon of at least two to three years. While choosing the funds to invest in, one should look at the long term track record of the scheme and the current portfolio.

Are systematic plans the best way to invest in mutual funds?

For regular income earners investing from their monthly savings, systematic investment plan (SIP) is the best way to optimise their returns. Not only does it help in the monthly savings being invested regularly, it also gives the benefit of an averaged entry point in volatile market conditions.

Capital protection funds are here. Are they good for small investors since they protect their capital? What has been the performance for such funds in the West?

The investment strategies in capital protection funds are based on suitable asset allocation oriented towards protection of capital. Some of the international funds offer capital protection strategies based on sophisticated asset allocation which enable a larger proportion of the funds being invested in risky assets (equity) but being dynamically managed to orient capital protection. Capital protected funds are likely to attract small investors who are keen on getting higher returns but would at the same time like to safeguard their capital. Capital protected funds have attracted large number of retail investors in developed countries.

What kind of returns can one expect from the equity market during the short to medium term?
With market being volatile, it would be difficult to estimate returns from equity investments in the short term. Ideally, the investments in equity should be for long term periods, where one can hope to get reasonable returns.