MFs Are Ideal For Individual Investors

Updated: May 18 2003, 05:30am hrs
South-India based mutual fund major Cholamandalam AMC Ltd (Chola) is a Murugappa group company, managing assets worth Rs 950 crore. Sashi Krishnan, its chief investment officer (CIO) spoke with Sudhir Shetty of The Financial Express about Cholas investment strategy and the steps taken by the government to induce economic growth. He also dwells on the strategies that will help equity and debt investors.

What will be the investment strategy for Chola in the equity and debt market and its outlook
The investment strategy for Chola Growth Fund - a diversified equity fund - will be to remain invested in quality stocks, across sectors, with promising medium to long-term potential. The focus will be on identifying stocks with strong competitive advantages and leadership status in their respective industries and a high potential for earnings growth in the medium term. The strategy is to remain invested in a portfolio of bluechip stocks on a bottom-up basis. Chola Growth Fund will avoid speculative stocks, highly illiquid small-cap stocks and momentum stocks. The portfolios will have around 15 to 20 clearly identified stocks and will avoid excess diversification. The investment strategy for the bond fund - Chola Triple Ace - will be tuned to ensure the highest level of safety along with adequate return. The fund will continue to maintain its bias towards investing only in government securities and AAA-rated corporate bonds.

What will be your advice to investors Whether to be selective in equity or still stick to debt-dedicated instruments
Mutual fund schemes are an ideal vehicle for individual investors, whether they are debt or equity funds. They not only provide the investors with superior returns through a diversified portfolio of financial assets, but also provide superior liquidity and a high level of disclosure. Individual investors should clearly assess their risk appetite before entering into mutual fund products. Liquid funds are a clear alternative to cash and savings deposits as they provide higher returns for a similar risk and liquidity profile.

For the risk-averse investor, debt fund would be best suited. Debt funds can be expected to give returns of about 7 per cent to 7.5 per cent in the coming year. Those with a higher risk appetite and longer investment horizons should look to invest in diversified-equity funds. Investors need to judiciously allocate their investment over the range of these funds to maximise their benefits.

Is your fund planning to come out with any scheme to overcome the volatility attached to both the debt and equity dedicated funds
We already have fixed maturity plans where the portfolio is immunised to eliminate interest rate risk and the consequent volatility in returns. We will also use derivatives to hedge the portfolios against volatility.

What is your preferable growth strategy - organic or inorganic
Chola will look at both the organic route as well as the inorganic route to grow. The product portfolio is almost complete and we now offer a complete suite of products to our investors. We will be plugging some of the gaps by quickly rolling out a monthly income fund and a dividend yield fund.

We are taking strategic initiatives that will help us stay on course towards a steady growth path and grow organically. We are not averse to inorganic growth if there is an appropriate opportunity.

Any plans for pension schemes as and when it gets cleared
We will be actively looking at launching and managing pension schemes, whenever the opportunity arises. We believe that this area complements our current competencies in the area of fund management and product distribution and this is the segment where we can add value to the investors.

What should the investor look forward to in view of dwindling interest rates and sustained battering of equity
Investors can still look for reasonable return from both debt as well as equity products in the long term. Debt funds give investors the advantage of better returns in the current softening interest rate scenario, as dropping yields will lead to higher net asset values. Investors in these funds will not have to sacrifice liquidity as unlike other contractual savings products and fixed deposits and investors can enter and exit debt funds as and when they need to without any strings attached.

Indian equities are very reasonably valued compared to most other markets at this juncture. There are early signs that the economy will gradually revive over the next 12 months. As far as corporate performance is concerned, though we have had a few surprises from technology companies, at a fundamental level, the improving trends in corporate sales and earnings growth that was seen in third quarter of 2002-2003 has continued in the fourth quarter of 2003-2004. Household ownership of equity shares has dropped to very low levels on account of the shift to contractual savings and fixed deposits.

With the falling interest rates, a reversal of this trend is on the cards. I expect the equity markets to improve significantly in the next few quarters. The depressed state of the capital markets could be a good opportunity for investors to increase their exposure to equity and equity funds.

What are the sectors you would like to bet on in FY 2003-04 What are the reasons for the same
Our investment approach is not based on a sectoral approach. The investment philosophy hinges on investing in quality stocks across sectors with promising medium to long-term potential. However, we are reasonably bullish on certain old economy sectors like automobiles, oil and gas refining and banking.

Every debt fund is more or less similar to other in terms of holdings. What are the criteria for choosing a debt fund over the other
Investors in debt funds need to evaluate a number of factors before they enter into a debt fund. This process is similar to making the asset allocation decision. Before choosing a bond fund, the investor should consider the following questions:

* What degree of risk is acceptable to him or her: The amount of risk an investor can assume will dictate whether she invests in a short, intermediate, or long-term bond fund. An investor can reduce interest rate risk by choosing a bond fund whose duration approximates the time horizon of the investment.

* What is more important to you-credit quality or yield: In making this decision, an investor should remember that most bond funds invest in lower Credit Quality paper and so the added credit risk associated with these bond funds is relatively higher. Investors averse to risk can also look to invest in AAAf-rated bond funds.

* How much income do you need: The amount of income needed from a bond investment will influence the degree of risk that an investor accepts. If more income is needed, the investor could choose a bond fund with a longer average maturity and so take on more market risk. Or that investor could decide to invest in a fund with lower-rated securities. If less income is needed, then the investor can invest in a fund with higher-rated securities and/or a shorter average maturity.