Markets will take sharp knock if FIIs sell: Madhu Kela

Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

The markets are reacting to incremental bad global news as it continues to tread on a shaky ground. Some experts are concerned that there might be a further downside if foreign institutional investors (FIIs) rejig portfolio and pull money out of the markets.

In an interview to CNBC-TV18, Madhu Kela, Chief Investment Strategist, Reliance Capital said that the markets will take a sharp knock if FIIs sell and there is possibility of outflow of USD 1 billion. He is worried that domestic institutions don't have much cash and can't absorb FIIs selling.

Kela added that there has not been any enthusiasm from the retail investors yet. He is seeing a benign 10-15% correction in global markets.

That's the reason he is approaching the market with a cautious outlook. "Valuations are not in bubble zone yet. But I am worried about big volumes in midcaps," Kela added.

However on an optimistic note he said that there might be big inflows in India if the global markets get stable. As a trading strategy, he advised that corrections should be used as  good buying opportunity.

According to Kela, markets are likely to be higher by next Diwali. He is bullish on midcap pharma but has booked profits in consumption stories.

On his recent promotion in the company expressing delight Kela said, "I will continue to play strategic role and not operational at Reliance MF. The company will not restrict itself only to an investment vehicle."

Here is the verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: How different will your current role be from what you have been doing all these years in building the asset management business of Reliance Capital?

A: As you can see from a press release, it is a much wider canvas and a much wider role. So, if I can break it up into two parts-it will have broadly two components. One will be on the role of the investment side and second will be on the role of the business side. We have been growing on assets since last ten years and now we are over Rs 50,000 crore as a Reliance Capital group in terms of equity assets and total assets of maybe over Rs 150,000 crore as a Reliance Capital group.

We believe internally that a strategy will play a very crucial role in essentially making return as well as growing these assets. My new role will involve a lot of strategic input rather than running the funds on a day-to-day basis and I am equally excited about the business side of the opportunity wherein I see tremendous strategic contribution, which I can make out of the experience, which I have had in equity markets for last 15 years. The environment is tough but I think that is why we have to shine and I am looking forward to it.

Q: How are you feeling about the role that you leave behind? It is something that you have been leading from the front with for many years now and you have got Reliance Mutual Fund to where it is today.

A: I must thank the Reliance Group for giving me the opportunity maybe 10 years ago and you can see-what is possible in life and what is possible in this organisation. When I joined we had hardly 15 people and I was one-man army in the investment department and we had hardly Rs 20 crore of equity assets way back in 2001. As you see the progression in last 10 years, the journey has been extremely exciting and very empowering from the group side. It is big news for the entire Reliance Capital team as to what the growth prospects and opportunity, which are there in the external world as well as internally for all of them.

Obviously, there is a bit of nervousness because any change brings a bit of nervousness and I have been doing this job for last ten years-I had been associated with the fund but I will be very much around. I will be very much playing the strategic role and will build this business and take it to the next level from here.

Q: The tail-end of your career saw a lot of changes in the mutual fund industry and ironically enough the role that you now take on sees a very different canvas for the life insurance and general insurance business. How do you plan to navigate through that because Reliance Capital has suffered in the quarter gone by on the insurance businesses?

A: On an operational basis, I don't intend playing any role. Let me give you an example of the opportunities I see here. One thing is to just cry about the environment saying, "These are the changes have been made. So what can we do? Now we have to just sit back and watch all these changes." The other thing is to challenge yourself and say, "As a fund if we have been able to generate 25-30% CAGR return for 15 years-why is it that we will not be able to go out and fight this environment and convince investors to come and invest money?"

One single opportunity, which I am very excited about, is we have something like monthly income plan wherein our assets were less than Rs 200 crore in the same environment, which has grown to 6,500 crore over the last 18 months. There is bank deposit of over Rs 200,000 crore every year which occurs. If we are able to make 2-3% higher returns for investor and pay monthly dividend and that is the track record, which we have been able to prove-why is it that this product cannot be a Rs 50,000 crore product for Reliance Mutual Fund?

Those are the strategic issues and those are the strategic thinking, which I hope I will be able to bring and there is a 1,000 member team at Reliance Mutual Fund, so by no stretch of imagination no one should think that I am the one who is going to do all of it. I would be providing the strategic input and we will take this forward.

Q: At heart though you have always been a stock-picker. Do you see yourself doing a lot of direct equity investments through Reliance Capital in a proprietary capacity from Reliance Capital? Do you see a lot of new fresh equity assets being picked up by the group in your new role?

A: I will continue to meet companies. That is not the plan at all to ramp up the proprietary side of the book or make Reliance Capital as investment vehicle. We have so many investment vehicles but whatever strategic investments which we do within Reliance Capital which is permissible within the regulatory regime-we will continue to do that but the focus is growing the businesses and making our businesses strong.