The deadly 3G of Indian equities – FPIs will have to pay double the price to join party again, says Nilesh Shah of Kotak AMC

• Investors are bullish on India and FPIs are regular buyers
• An arbitrage fund is the Shikhandi of Mahabharat
  
• Lacking in some areas like garments, auto components and soft toys and other manufactured goods

India is the toast of the world at this moment. From steady macros to foreign investments, the interest in India has never been higher. In conversation with Malini Bhupta of Business Insider India, Nilesh Shah, Managing Director of Kotak Asset Management Company, says that India is delivering solid growth that is green and with superior governance standards. If foreign portfolio investors want to come back after their selling spree, it won’t be at cheap valuations. Shah also has very good money advice for those who want to get rich. Edited Excerpts: .

Where are the markets headed? Can the dream run continue?

From here on markets are fairly priced. Investors are bullish on India and FPIs are regular buyers. In other markets, entry is easy and exit is difficult. In India, entry is difficult but exit is easy. If you want to take out $35 bn from the market, please be my guest, but if you want to buy then please join the party and pay double the price. Investor momentum is positive but you are buying into a fairly-priced market. There will be events like Fed pivot, RBI’s pivot, corporate earrings and election results that will impact markets in the near term.

But if you cut out the noise and take a five or ten year view, this market is doing in one year what we used to do in 50 years - creating a GDP of $1 trillion. If we are going to become a $5 trillion economy and then $10 trillion then this is the journey to participate in. Unlike China, which also went from a few trillion dollars in GDP to $15 trillion, the governance standards of India are better.

This growth will happen as India’s governance standards are comparable to the developed world. We are the only country adhering to COP26 targets. We are giving growth that is green with good governance. This is the deadly 3G.

Mutual funds have plummeted in May. What happened to net equity inflows last month?

I think retail investors have matured a lot. Whenever markets are cheaper it is SIP plus subscription and our inflows go to 15-25k, whenever markets are expensive then it is SIP minus some redemption and our monthly inflows look like Rs 2k-3k. So, this is the maturity of investors. God forbid if markets go down tomorrow, I am sure money will flow. Earlier when markets used to correct, I used to call investors and reassure them. Now, when markets go down I get calls from distributors that more money will be sent. Hats off to mutual fund distributors, who have drilled the asset allocation principle into the minds of investors.

Many have blamed mutual funds in the past that the demand for even luxury cars have been impacted thanks to mutual fund inflows. Do you agree?

I don’t buy this because I have seen many people buy Mercedes after doing an SIP but rarely have I seen people defer buying a car to put money into mutual funds.

Given that you don’t own a Mercedes or a BMW, what money advice would you give to investors?

The first thing I tell people is that it should be income minus savings that should equal expenses, not income minus expenses equal to savings. I tell my staff and high networth investors the same thing. Make regular investments because timing the market is of no use and nobody has succeeded in doing that. And third, be a disciplined asset allocator. Everyone wants to have a look back option. Asset allocation always delivers better returns. When people ask me to demonstrate this, I show them my Kotak Multi Asset Allocator Fund of Fund, which is up 4x in 10 years. We divided between debt and equity. But now it also has gold. We do these 3 things; 10 years we did it 4 times and in 17 years 15 times.

How do you expect India’s key export sectors to do that many parts of the world are in recession?

India is doing extremely well on services exports. I think 45% of all global captive centres are now in India. Their growth rate is even higher than IT and BPO services growth rate. Most people are realising that it is better to do business with India than China because IPRs are protected and there is value for money. There is delivery and professionalism. So, services export will continue to do well. On the goods export, we missed the bus in the ‘60s with Korea, ‘80s with China and in 2020 with countries like Bangladesh and Vietnam. We have to find our niche. In 2-wheelers and generic pharma we are world class players. We are developing seeing the same strength in mobile phones and toys. But there are areas where we are lacking, like readymade garments, auto components, and other manufactured goods including soft toys.

The PLI scheme is a step in the right direction. We are incentivising manufacturers to set up their base in India and become part of the global supply chain management. We are lacking in some areas like garments, auto components and soft toys and other manufactured goods. It is a slow process but we are on the right track. Despite the world slowing, our market share in exports – both goods and services – will continue to rise.

What about IT services?

Our IT businesses today are doing well but the base has become big. The base is no longer a few billion dollars; it is a couple of hundred billion dollars. How do you grow on that base? If TCS has to grow by 10% it has to add 60,000 jobs on an employee base of 6 lakh. It is not going to be easy. We are now becoming part of the global macro. If the American banking system or insurance suffers, our IT order will suffer. But by investing for the future we’ll be able to overcome this. Earlier we were into – let’s say - Y2K 2000. Then we moved into application and infrastructure management. Then we went into product development, then cyber security, cloud computing, digital solutions. We have to keep increasing value-add in IT services in order to retain a major part of this business opportunity. It is a long story but we have to keep chugging along.

You had asked during the pandemic as to why no Indian company had developed a Zoom like app for video conferencing. Has Indian IT missed the innovation bus?

Let me give you a cricket analogy. If you see most Indian cricketers were not playing hook shots and we used to duck against bouncers. Now our players don’t mind hooking – it was an evolution and we copied from others. Similarly Silicon Valley is willing to fund risk and innovation. Now Indian companies are getting into it. I think core banking will be driven world over by a TCS or Infosys product. In payment, if UPI goes out, it is better than anywhere in the world. Slowly our IT companies will pick up pace in products too. What we did in core banking solutions we can do across sectors.

The Reserve Bank of India has paused rate hikes. Do you think that rate cuts will begin this year?

I think that the RBI has done better than any other central bank. And the Governor getting the Central Bank of the Year award is testimony to that. They have all the options available to them. I think RBI will be driven by data. The central bank will ensure there is enough liquidity so that growth does not falter. It will keep short term interest rates high to deter inflation and rate cuts will begin after FOMC starts cutting rates. I think the rate cut cycle is a 2024 question and not a 2023 question.

Do you think it is a good time to look at debt?

Investors have to look at their asset allocation and then decide. If you are under-invested in debt then it is a good time to invest in debt. But investors must keep in mind that the returns will not be the same over the next six months as seen in the last six months. Please don’t invest in debt funds because last six months returns were good. Please don’t invest in debt funds because you are worried about what will happen in equity markets. Take a call based on asset allocation. Over the next three years, rates will come down. Hence, it is important to lock into a longer duration debt fund with a three year plus horizon. Before March there were some tax advantages, but now debt funds are at par with bank fixed deposits. But the longer-term yield curve is still steep so investors can grab that opportunity.

A lot of thematic funds are being launched. What is the reason for that?

Most of us have completed the nine categories of large cap, mid and small cap funds. Now the only option available is thematic. We have seen that some thematic funds play out over a longer period of time. IT and Pharma were ones which started this thematic game. Now it’s moved into concepts like manufacturing & infrastructure themes. Compared to normal equity funds, these are exotic funds - higher risk, higher return. They give concentrated exposure to a particular theme. And all themes are cyclical. You can’t expect a straight line because IT has done well. They come with higher risk and higher return. Thematics are higher risk compared to normal equity funds. If you have tasted the normal equity funds, then you can try the thematics for something extra.

Arbitrage funds are now also being talked about. What is the advantage of investing in these funds?

An arbitrage fund is the Shikhandi of Mahabharat. It is an equity fund in the eyes of the regulator but has the risk and return profile of a debt fund. We achieve this paradox by buying equity in the cash market and we sell futures. No matter what happens to equity prices I am hedged. I make my spread on arbitrage. That’s why investment is an equity but because you are not impacted by the price movements and your returns are always locked in, it has a debt kind of return and risk profile. Put together this is a fantastic product which gives you equity kind of taxation benefits and debt kind of risk/return profile. This creates an ideal opportunity for investors. It is a short-term product and money can be parked for 3, 6 or 9 months. This is a parking fund, it is not for investors.