In an interview to CNBC-TV18, Lovaii Navlakhi of International Money Matters spoke about various economic factors, which indicate that this is right time to invest in equity mutual funds.
Also Read: Mutual fund & their tax benefits
Below is the verbatim transcript of Navlakhi's interview with CNBC-TV18.
Q: We have seen foreign investors bringing in flows into our equity markets and yet recent data shows that mutual funds have been net sellers. What is the reason they are facing this kind of redemption pressure? Logically, wouldn't this be a good time to be buying?
A: Mutual fund investors have got tired so they have been waiting on the sidelines with their investments, which have been in the red and when they start seeing it getting into the black, they decide to bailout. Our view has been quite the opposite ever since the time in September that the government decided to hike diesel prices by 10 percent and somewhere around that time when the index was 17,300 level, one has not seen 17,000 since that time.
It has crossed 18,000 and then hovered between 18,000 and 20,000 from that time on and essentially investors must remember few macro and fundamental reasons why they should invest in equities.
In the short run of course there are sentimental reasons and that is why there is some selling pressure, but long-term investors, I can see a whole bunch of positives in the market as follow:
(1) we are at the top of the interest rate cycle, we are seeing that interest rates are going to come downwards and whenever that happens it is typically very good for corporate
(2) valuations have now dropped below the long-term average so it is not like dirt cheap, but it is certainly a time when one should consider investing in Indian equities
(3) internationally also we are getting supported on two fronts; one, commodity prices have fallen sharply and as a result of that one has seen the impact on oil prices etc so the subsidies that Indian government had on petrol and diesel, apart from their increasing prices on one side the subsidies have dropped because international prices have also dropped and simultaneously one is seeing that the quantitative easing by US and Japan is continuing so one is seeing flows continuing to come into the market.
Therefore, whole bunch of reasons why I would recommend that people do look at equity markets.
Indian growth numbers, gross domestic product (GDP) numbers were not very good but if compared with the international markets, they are relatively much better and the fact of the matter is that in the long run it is profits of companies and the growth in profits of companies, which will dictate the type of returns one make in the equity markets.
So, I would strongly recommend people to look at equities as an asset class, consult financial advisor and look at asset allocations. Therefore, I am not saying go overboard and pump in all money today, but certainly look at asset allocation and the amount that need to add to equity. One way of reducing the risk is to enter in a staggered manner.
So I can see whole bunch of reasons and when one look back at September to today on macro front, one do not know what sort of reforms or what sort of issues -- there have been issues on political front, corruption front, but over the years India has proved far more resilient and I do see scope for investing in equities.
Caller Q: I am a 53 year old working professional. I have already saved a corpus of nearly Rs 1.5 crore for retirement after catering to all my liabilities. But, most of my savings are in real estate or bank fixed deposits. With markets looking to head higher now, should I think of reallocating certain money to mutual funds?
A: I gathered that you are close to retirement and typically to look at that period and focus more on safety of capital rather than growth, the only point that one has to keep in mind is that during retirement there are whole bunch of factors that play role; what you are getting by way of returns, what is inflation, what is tax liability and most importantly what is going to be a life expectancy because you certainly do not want a situation that the corpus that you have accumulated runs out because it does not remain abreast with inflation and we have seen that in the recent past inflation has sometime mean 4-5 percent, sometimes mean double digit and bank fixed deposits etc do not give returns, which are beating the inflation.
So, it is always good to have a distribution of your investment in different baskets. When you retire, since you mentioned that you have real estate and I am assuming that these are given out on rent. So, you will have rental income and so therefore the other investments will be subject to tax. Therefore, one of the important things to keep in mind is what is going to be the return post tax for those investments.
Your first question about reallocating your money to mutual funds; I will go one step before your equity mutual funds and ask you to consider investing some money in fixed income mutual fund because you will get a bit of tax advantage.
In the last couple of years we have seen short-term and even accrual funds which are available from different mutual fund houses giving you about 9-10 percent return, in fact 11 percent in the last one year. So on post tax basis you have got between 9-10 percent and that is much better than your bank FDs even if you are getting 9.5 percent and they are subject to tax, your return is dropping.