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Slowing Economy is my Anxiety

Chandrashekhar Sathe, CEO, Kotak Mutual is concerned more about the economic slowdown in the Indian and the US markets, rather than the widespread fears of rolling settlement or badla ban and believes that market will soon take the systemic reforms in stride.

Although a late entrant in the mutual funds business, Kotak Mahindra Mutual Fund has attained a critical mass with Assets under Management at Rs 1300 crore on May 31, 2001. Barring a tax-planner, the AMC currently offers a range of basic fund products, supplemented by MNC and technology funds. The pioneer in gilt and fixed maturity segments, the AMC has received healthy inflows in its bond funds. On the other hand, its equity funds have failed to make a mark, impacted by the sustained downturn in the markets.

Kotak Mahindra AMC's chief executive officer, Chandrashekhar Sathe comments on a range of issues, specific to his funds and the broad markets.

On extending the tie up with Old Mutual to asset management business
CS: Kotak Mahindra greatly values partnerships. It has an impressive record of attracting some of world's best names as joint venture partners. We have Goldman Sachs in investment banking and stock brokerage business, Ford Credit in auto finance and Old Mutual in insurance. Currently, there are no plans to induct a partner in the AMC.

On maintaining a diversified portfolio in K-30 and K-Balance after the tech debacle of 2000
CS: In addition to K 30 and K Balance, K MNC is a well-diversified portfolio. (K MNC is not a sector fund). They will continue to remain well-diversified. The sector allocations can only marginally change without affecting the diversified nature of the portfolio.

On checks and balances needed to stay diversified
CS: I think a fund should limit to what extent it is willing to go overweight or underweight on a particular sector. The extent of overweight or underweight can be understood in terms of variance from a broad market indicator such as the NIFTY or the Sensex. One can have absolute limits or relative limits such as overweight not to exceed "x"% of a sector's weight in a chosen index.

On spreading K Tech investments beyond pure infotech companies to cushion the NAV
CS: In addition to IT dependent stocks such as HDFC Bank and biotechnology stock such as Ranbaxy, we do have exposure in the entertainment stocks such as Zee, Balaji, Gramaphone Company, TV18. As more opportunities become available, we can consider inclusion of such stocks in the portfolio.

On outlook for equity markets and impact of rolling settlement
CS: Our main area of concern is the economic slowdown in India and the US rather than the so-called widespread fears about rolling settlements and dispensing away of badla. In the past, markets have taken all systemic reforms in stride and have followed fundamentals for market direction. We think that the market will take the new situation in its stride sooner than what most people expect. We expect the activities on the derivative side will sharply pick up leading to improved volumes in the cash markets. Investors and speculators of all hues will realize that positions taken in derivatives will need to be supplemented in the cash markets to optimize returns and reduce risk.

On spreading awareness about gilt funds among retail investors
CS: In our view, gilt products were demarketed by the large bond funds in the initial stage citing primarily two reasons. 1. Gilts are volatile and 2. Credit risk is not such a serious concern given the large size of a portfolio of diversified credit risk. The first argument is facetious. Bond funds appear less volatile because of the valuation practices followed in the industry where corporate debentures are valued only once a week and there is element of discretion regarding the credit spreads used for valuation. The second argument is wrong. Consider a fund with a corpus of Rs 1000 crore. Such a fund accrues interest of Rs 27.50 lacs per day (at about 10% p.a.). If there is a credit default of Rs 5 crores, it will take away accrual of about 20 days. In other words, the fund will not earn anything for that number of days.

On serial plans finding greater acceptance with their implicit assured returns, given the volatility in bond markets
CS: Serial plans are meant for people who know how long they want to stay invested and who do not want to take any risk. This purpose is eminently achieved through Serial plans in a Gilt fund. Only KMMF has the full range of gilt serials going up to the year 2019. Short-term serial plans taking corporate exposure are risky even if a company were to default only on the due date for technical reasons and there is a delay in payment of principal amount.

On the need for a G-Sec based bond index fund, with debt market indices giving more stable returns for a longer time frame vis-à-vis equity funds
CS: I-Sec and JP Morgan have started such indices. They can be used for measuring relative performance. However, we do not see any need to launch such an index fund. It is not possible to meaningfully define what is long term anywhere in the world while short term is relatively easy to define. Higher volatility of index only means that it may take a longer time (nobody knows how long) to give superior returns. Or, in the short term, a highly volatile portfolio may give large losses or large gains. Beyond this one cannot attach more meaning to high volatility numbers. On the other hand, low volatility means the returns will be lower but there is far greater certainty of always remaining positive. Comparison you are suggesting of the two different portfolios in any time frame should be avoided. If you choose another period, the comparison could be dramatically different. Investors should not lose sight of asset allocation and their preferences.

On any move to launch a monthly income plan
CS: Of late, MIPs are causing some discomfort to investors. Also, MIPs are not tax efficient for small investors. Monthly withdrawal plan (MWP) would be a better choice. However, communication about the merits of MWP is quite complex.

On same portfolio under K-Bond's wholesale and deposit plans whereas the risk profile of investors differ
CS: Having same portfolio achieves economy of scale. In an open-end fund, pricing of NAV has to be close to the market, irrespective of the nature of investors to take care of the volatility of unit capital. In any open-end scheme, you have to protect the interest of all classes of investors. In our view, there are only three classes of investors. Investors who are coming in, investors who are staying in the fund and investors who are leaving, irrespective of the size of their investment. This can be achieved only through a commitment to being fair to all by ensuring proper valuation at all times and ensuring adequate liquidity of the portfolio.

On optimal size for a debt fund, given the depth of the bond markets
CS: This is a very difficult question to answer. The size today is primarily a function of good credit being available as much as liquidity. Therefore higher proportion of gilts is inevitable till the debt market volumes build up. The measures to improve liquidity have just begun and deep debt market is some time away. Larger size reduces risk and therefore returns can be a shade lower. That is an acceptable proposition if the credit quality of the portfolio can be maintained.

On interest rate outlook and any negatives that can spoil the party in bond markets
CS: The interest rate outlook is positive in the current situation. Present level of monetary expansion, onset of a proper monsoon and lack of demand for money from the industrial and commercial sector should help further softening of interest rates for some time to come. The relatively benign inflation outlook reinforces this view. Also, US interest rates could soften further. However, level of Government spending is cause for concern. Triggers that could lead to bouts of volatility could be serious deterioration in oil prices, lower export growth, pressure on rupee and political events. Also, RBI is overtly supportive of lower interest rates. Till now, the Government's borrowing program has progressed well. At the same time we feel that lower interest rates scenario cannot last very long unless the chronic fiscal imbalances are decisively resolved.