'Domestic funds to be growth drivers'

, chief executive officer, Kotak Mutual Fund.

The newly appointed CEO strongly feels that the domestic money will further fuel the rally in the next three to five years, as savers (domestic players) will turn investors. Business Standard spoke to Kirkire on Friday during market hours when the Sensex was trading at a record high. Excerpts from the interview:

Are the markets overvalued with the Sensex crossing the 7000 mark?

The 7000 level for Sensex is just a psychological benchmark. With the Sensex P/E at 12 times of FY06 earnings and corporate numbers to grow at 15-20 per cent, I don't see the markets overvalued at current levels. We might see intermediate correction with investors booking profits at higher levels, but overall the market will continue to outperform its global peers as Indian equity markets are going through a structural bull phase.

The capex cycle has just started and most companies are having a negative working capital, which means that the corporate India is on a growth path. With India's GDP growing at 6-7 per cent, I see no reason why we should not continue to attract money from global investors.

Are Indian markets over dependent on foreign capital to maintain the momentum and provide the necessary liquidity in the system?

Indian markets have attracted strong inflows from foreign funds in the last few years. Over $8.5 billion flowed in last year and in the first half of the 2005 calendar year, the FIIs have been net buyers of over $4 billion. We expect the foreign flows to remain positive in the current year. At the same time, the domestic investors are getting increasingly positive about the markets.

You are saying that domestic money will fuel the rally. However, the mutual fund industry has failed to attract new money and increase the assets under management (AUM) over the last two years.

Things are changing. I think the savers will have to turn into investors to beat inflation and the liabilities that they have created for themselves. India's young population is increasingly getting exposed to various liability products such as home and car loans.

These loans have interest liability which is above the normal bank interest rate. To beat inflation and find a way to re-pay these high-cost debt, individuals will have explore other options. It is not only to meet new liabilities but also for creating wealth that savers will have to turn to investments. This is where mutual funds will play a big role. I expect the AUM of mutual funds combined to increase multi-fold in the next three-five years.

Kotak MF recently announced the launch of Kotak Contra Fund. How will it be different from other funds and isn't there a higher risk to go against the general momentum of the market?

We believe equity markets are not for short term. The general tendency in the market is to invest in momentum stocks. The Contra Fund was launched with a view of taking bets on companies which have growth potential but are currently out of favour.

As far as risk is concerned, as these businesses are anyway out of favour and are undervalued by the market, hence the monetary risk is limited. However, there could be some time risk in unlocking the values in these businesses which can be mitigated through creating a portfolio of 30-50 businesses.