Suresh Soni, CEO, DHFL Pramerica says that with sustained retail interest, the share of domestic funds in the overall market cap will rise significantly
Over the last year, the industry has seen strong growth following demonetisation and reducing appetite for physical assets. Besides this, we believe there are strong drivers for structural growth of the industry such as opening of about 30 crore new bank accounts over last few years, reducing appetite for physical assets and falling interest rates.
The acquisition of Deutsche Bank's mutual fund business about 18 months back was a game changer for us. It was the largest acquisition in the mutual fund industry till date. In addition to enhancing the investment platform, we have taken a number of steps to engage our clients and distribution partners. Our number of branches have gone up to 23 from 10 last year.
Managing return expectations
While equity markets create wealth over a long-term, it is natural for equity markets to have some near-term fluctuations. Investors would do well to factor this in and invest in equities with a long-term view. Also, I would always advocate a balanced asset allocation with some investments in fixed income to attain an overall balance in the portfolio.
While valuations are high, let's remember that the market is not a monolithic entity. It is the average of all sectors. However, we do find a few pockets where valuations are stretched either on optimism or on low floating stocks. Our investment teams work very hard to find investment opportunities. All our funds operate within a clearly laid down, true-to-label investment framework. Both on equity and fixed income, there is rigorous discussion and a clear action plan.
Rising industry assets
We believe there is ample scope for the industry to grow. Out of domestic household savings of over $500 billion per anum, equity flows account for less than 4 per cent per anum. As a per cent of market cap, equity mutual funds account for less than 6 per cent. We believe there is ample scope for institutionalisation of equity holdings via mutual funds. Having said that, certain segments of the market, like micro caps and small caps, do pose challenges due to poor liquidity.
Growing clout of domestic funds vis-a-vis FIIs?
With more and more retail investors being interested in mutual funds, their importance is gradually growing in the market. But from an overall ownership perspective, FPIs own about 27 per cent of Indian market cap, whereas mutual funds own less than 6 per cent. With sustained retail interest, the share of domestic funds in the overall market cap will rise significantly.
Outlook for equity and debt
The GDP growth in the last quarter, at 5.7 per cent, is one of the lowest readings we've seen in recent times. We, however, believe economic growth is likely to bounce back to 6.5 to 7 per cent over the next 12 months. While long-term prospects for the equity market remain strong, we must admit that valuations are no longer compelling and leave room for disappointment in the near term. On fixed income front, the market is likely to retain surplus liquidity. However, the scope for further rate cuts appears limited. We would recommend investors to consider short-maturity and accrual funds for fixed-income deployment.