LIC Mutual Fund is trying to get back into investors’ reckoning after the indifferent performance of the past few years. Saravana Kumar, Chief Investment Officer, has the key responsibility to deliver the kind of returns that will get investors excited and return to the fund in greater numbers in future. He shared his thoughts about the direction of the markets and the reasons for his cautious optimism on the economy’s performance over the next year. Excerpts:

With the equity market at their peaks, there are some opinions that there may not be much more steam left in the rally? Do you agree? What will drive the markets hereon?

I am approaching the current market with a note of caution. In the past, high valuations have led to future disappointments with respect to returns. To call out peak is a tricky task; however, current valuations suggest little room left for markets to go further up. I believe in the longer run, earnings growth would drive the markets rather than multiple expansions.

Do you expect corporate earnings to start picking up in the first/second quarter this fiscal? Every one had earlier predicted that this may be the trigger for markets, going forward.

We have to give some time for the GST shake-up to settle down. In the demonetisation phase, we have experienced a strong and resilient formal economy springing back quicker than anticipated. In GST implementation, it is likely to be repeated. However, we can estimate it would take a full annual cycle of GST to complete before businesses take drastic steps towards changes in business processes. In this light, corporate earnings are expected to start in picking up in the second half of the fiscal.

What is your call on Sensex/ Nifty levels for this year end/fiscal end?

Earnings momentum would drive markets further rather than multiple expansion at this juncture. GST implementation would require four-six quarters to settle down which may have a bearing on the earnings growth for this timeframe. At the current levels of indices, there looks limited upside. Single-digit returns may be expected at best. However, investors need to be cautious while investing at current levels.

Do you see further cuts in interest rates happening any time soon?

The latest inflation numbers are less than RBI’s current inflation target of 4 per cent and would indicate the possibility of a rate cut. However, if one analyses deeper, according to data, the inflation has come down mainly due to decline in prices of vegetables, pulses, etc. The decline in prices of vegetables and pulses are temporary in nature and may prices may increase in the coming months. Apart from that, the Seventh Pay Commission was announced recently and the payout would lead to some pressure on inflation.

If RBI decides to go for a rate cut, then India would not be an attractive destination and significant foreign investors would move out, thus leading to a depreciation of the rupee. The depreciation of the rupee would again lead to inflation pressure. Thus, it looks unlikely that RBI would go for a rate cut on August 2.

How long do your investors hold their investments in your folios? Do they churn regularly or cash out early? What steps are being taken to keep them invested for the long term?

Investors hold on to their investments for long term. Generally, we have witnessed that the benefits of long-term investment outweighs the short-term gains. To keep our investors invested in our schemes, we try to deliver returns that are among the best in the market, which would compel investors to stay invested for the long term.

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