Big Talk- Vikrant Gugnani

BIG TALK: VIKRANT GUGNANI, PRESIDENT, RELIANCE CAPITAL ASSET MANAGEMENT

‘Investors want a big basket of funds’
Sandeep Singh Posted online: Monday , July 09, 2007 at 1516 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

It might be the country’s largest mutual fund, its equity funds might be regulars in the list of chart-toppers, but is it guilty of tapping the most enduring myth among mutual fund investors: an NAV of Rs 10 is ‘cheaper’ than an NAV of above Rs 10? Reliance has six diversified equity funds, and the NFO (new fund offer) of the seventh, Reliance Equity Advantage Fund, closes tomorrow. Why this race to launch new schemes? Volumes, say industry watchers. Value, says Vikrant Gugnani, president, Reliance Capital Asset Management. In an interview to our correspondent, Gugnani explains why it’s not product duplication and more.

You already have six diversified equity funds. Why a seventh, that too one that is similar to some of the others?They are not similar. Each one is servicing a unique investing opportunity and, therefore, has a unique investment pattern. For instance, the focus of Reliance Vision is on large caps, while that of Reliance Equity Opportunities is on companies that show multiple investment opportunities.
What’s the investment idea behind your new scheme, Reliance Equity Advantage Fund?We are firm believers in the India growth story. The idea behind the new scheme is to outperform the market, as represented by an index. The Reliance Equity Advantage Fund is a large-cap-oriented, index-plus fund. The entire corpus of the fund will be invested in sectors in the same proportion as that of the Nifty. Further, 80 per cent of its portfolio will mimic the Nifty, while the remaining 20 per cent will invest in stocks outside the Nifty. We will rebalance the scheme every month.The scheme will also short-sell for higher returns, which is something index funds can’t do. In other words, it is benchmarked to the Nifty, but the active management style and the broader investment mandate give it a chance to better the index.
If a sector is faltering, you still have to maintain its weightage.Such situations do arise. Having said that, even when a sector is not doing well, there are companies in it that are doing well. Our active stock-picking approach for 20 per cent of the portfolio will address such scenarios, which, we believe, will work to our advantage. For instance, within a sector that is doing badly, we can short Nifty stocks and buy stocks from outside the Nifty domain.
Isn’t the difference in profile and investment pattern minor, sometimes even cosmetic, done simply to do an NFO (new fund offer) and raise AUMs?Investors want a large basket of schemes to service their objectives. They want more than just plain-vanilla funds, and schemes like Equity Advantage Fund fill that space.
At a time when most fund houses are launching mid-cap and small-cap funds, you are launching a large-cap one.Opportunities to invest in small-caps and micro-caps are limited, which is not the case with large-cap stocks. India has a market capitalisation of $1 trillion, which is just 0.8 per cent of the world market cap. Our GDP is just 2 per cent of the world GDP and foreign interest in Indian equity is a mere 0.4 per cent. Even if foreign interest grew to 1 per cent, it will translate into additional inflows of $330 billion, most of which will go to large-cap companies.
But will that money come?It should. According to Goldman Sachs, we will become the world’s third-largest economy by 2030. GDP growth rate of above 9 per cent a year is here to stay. Our corporate profits will grow 15-25 per cent over the next three years. The index PE is currently 19.6. If earnings continue to grow at 15 per cent a year for the next three years, the PE will fall to 12.9 per cent; if earnings grow at 25 per cent, the PE drops to 10 per cent. So, the index becomes undervalued. Just 2 per cent of Indian household savings come into the market. Even if it increases to 5 per cent, the potential for the equity market and the economy is huge.
In recent months, we have seen a select companies or sectors drive the market. Which sectors you think will drive the next leg of growth?Because of structural shifts, GDP growth has increased from 5.5-6 per cent a year to 9 per cent now. I expect this to continue. In this backdrop, companies with scalable business models, competitive nature, cost leadership and strong execution will deliver. So potential large-cap companies — mid-caps that are expected to become large-caps in five years — that are driven by strong domestic consumption and infrastructure growth, media and retail will do well.
In April, you came out with a Rs 100 SIP. How has the response been?Overwhelming. Last month, we added 30,000 new SIPs, of which, 18,000 were in the Rs 100 bracket. This product is not for the metros, but for small towns, where people are hesitant to invest in equities. This product enables them to make small investments and have a flavour of the market. The second category is the non-privileged, who can’t afford high SIP amounts.