In an exclusive interview with The Financial Express, LICMF investment chief V Ramanan observed that it is prudent to follow a wait-and-watch policy for another quarter until there is a definite trend of economic revival and turnaround.

On LICMF's current focus:

According to Ramanan, the cement sector is witnessing a definite improved trend, but the demand is from the housing sector and not the infrastructure sector. So, we prefer to wait and watch whether there is a definite trend, he said. The LIC Mutual Fund is currently focussing on the cement, capital goods, auto and the auto ancillary sectors, he added.

On growth rate ofsoftware industry:

We have been booking profits in IT stocks like Pentafour, Satyam, NIIT, Wipro, Infosys and have substiantially increased our holdings in Digital Equipments. It is the only sector in our economy which is way ahead of all others, with a growth rate over 50 per cent per annum. Growth for companies in this sector is projected at 45-70 per cent for the next two-three years, while other sectors cannot grow at more than 20-25 per cent. So, one should stick to the IT sector very selectively for the next two-three years. We will not be investing in the IPOs of unknown and unheard of software companies till they have a track record, like for example, Sonata and Software Solutions.

On capital goods:

According to the investment chief, in the capital goods sector, companies which currently under LICMF's focus are Bhel, ABB and Crompton Greaves.``A quarter down the line, we will looking at other sectors as well. We expect the pharma and FMCG sectors to grow at a rate of 20 per cent. Atpresent, we have 10 per cent exposure in pharma sector and 20 per cent in FMCG and 10 per cent in IT,'' he added.

On petroleum sector

Being a mutual fund from the older generation, LICMF has investments in oil, banking, petroleum and petrochemical, aluminium and metals and minerals as well. "The petroleum sector is dominated by PSU giants like IOC, HPCL, BPCL. Right now, the returns on these investments for us is around 30 per cent, as we had invested long ago. In some of these scrips we will not like to book loss at the present moment. They are still there in our portfolio. In the next two-three years, we expect the performance of this sector to improve''.

The petrochemicals sector is dominated by major players like Reliance and IPCL, with the international prices of petro products going up. Though there may not be a significant growth potential immediately, the scrips are fine to hold on to.

On banking industry:

Since our banks are heavily into financing commodities, with the revivalof the commodity market, the banks should also see an upside. But I feel if there is a genuine turnaround in the industrial front and with the credit picking up, the smaller and medium companies are improving their cash position and becoming stronger to service their borrowings. The level of NPAs of some of these banks should come down. In fact, a turnaround in the economy will boost the valuations of banks and financial institutions. Our major holding is in SBI, ICICI, IDBI and public sector banks like BOB, Corporation Bank.

On the debt scenario:

We have found it very dificult to invest in good quality paper. In the last three years, interest rates have fallen by nearly 6 per cent. Early 1996, we were investing in AAA companies at 18-19 per cent. In the last three years, the medium-term [5 years] gilt yields have come down by 2 per cent and the spread between AAA and gilt has narrowed by 4 per cent, accounting for an overall drop of nearly six per cent. Now, 5-year AAA is quoted at 12.5 per centand the spread between government paper and AAA [5 year] is a bit above one per cent. It has become very difficult to get good quality paper and at an acceptable yield. Our investors expect at least 10-11 per cent. On top of it, we have to pay 11 per cent tax on the distributed income plus the overheads. For all these components, we have to earn more than 13-13.5 per cent. So, it is tough to run any scheme which will yield more than 10 per cent.

On reducing interest rates:

I strongly disagree with the clamour to cut interst rates, as our banks will not be able to afford any more cut in interest rates. Our banks should be allowed to settle down and consolidate at the present level for some time. Secondly, in this country, there is a very large population who, for their livelihood, depend on the returns from fixed interest investments including bank deposits. This population has been hit hard by the steep fall in the interest rates. Several segments of our economy are still underdeveloped -- we donot have proper pension plans, we do not have a vibrant and healthy equity market; where will this population go to support themselves? Our savings rate is increasing year on year [pensioners and widowers]. Even if the government overshoots its borrowing programme, it will not impact the liquidity in the system. There should not be any need for putting more funds into the system. With the busy season settling down and more credit and more offtake from the corporates, if anything, the interest rates should firm up some what.