Q&A: Vijai Mantri, CEO & MD, Pramerica Mutual Fund

'Investors missing chances to create wealth'

Vijai Mantri, CEO and MD, Pramerica Mutual Fund, tells Dipta Joshi that investors should avoid timing the markets. Edited excerpts:

The last five months have seen money flowing out of equity mutual funds. Why?
In 2007-08, mutual fund investors saw net asset values (NAVs) dipping. With NAVs back to those levels, investors are exiting. Basically, Indian investors are uncomfortable with the market rising too fast. The last time they invested, they probably lost the opportunity to exit when the market hit 21,000 levels. But you can expect them to be back, as they are only trying to time the market. Investors always want to know the direction of the market. We think an investor’s strategy to time the market is the biggest impediment to wealth creation.

Given the outflows, is this a good time to launch new mutual funds?
While Indian markets are a great place to be, investors are missing out on the opportunity. Everybody is looking for returns that equity markets give, but wants to stay away from the volatility.

So, we advise investors that if they have not participated in the market, or participated but not made money, we will do it for them by looking at the fundamentals. We have a model that looks at both debt and equity, based on the theory of mean reversion.

How does the mean reversion model work?
It basically means that anything that goes up beyond its intrinsic value will come back to it. In the long term, markets are driven completely by fundamentals like price-to-earning multiples, gross domestic product (GDP), inflation, interest rates and corporate earning forecasts. But in the short term, it is the momentum that is in play. Momentum is dependent on liquidity conditions and volatility. While we have assigned 70 per cent weight to forward-looking macro factors, we also want to capture some upside in the momentum.

What about investors who want to invest directly in the market? 
Any advice? They could do that, but the track record of investors getting directly into the market has been quite pathetic. In 2000, when the stock market crashed, mutual fund NAVs also dipped.

Later, when the market recovered, NAVs clawed up again. Look at the information technology stocks in which many retailers invested. A lot of these are not even listed anymore. Similarly, after the dip in 2008, NAVs rose again and mutual funds survived. But real estate and infrastructure stocks that interested retail investors are yet to recover.

Many investors might get the market correct and exit at the right time. But the question remains that can it be done on a consistent basis. In such a scenario, a mutual fund systemic investment plan proves to be the best strategy for retail investors.

Which sectors are you bullish and underweight on?
When you pick sectors, you look at the macro economy and where the next big opportunity will come from. India’s per capital GDP income is expected to rise from $1,000 to $1,500. At $1,500 income levels, people spend on discretionary items. We are looking at companies in retail, media, healthcare and other sectors that will benefit from such buying. We are also looking at soft commodities related to agriculture. So companies dealing with water desalination, water irrigation and waste management could be looked at.

We are underweight on the real estate sector, which is unregulated and has corporate governance issues. Their balance sheets also pose serious challenges.

The listed real estate companies were quite strong in their regional markets, but when they expanded presence across the country, they bought land at high costs. A good way to play the real estate market is through housing finance companies.