Tata Sons’s decision to stop lump sum flows is counterproductive

Because what we do not want and which is what is counterproductive for any investor investing in mutual funds or especially in small cap mutual funds is a significant surge in inflows which forces the fund manager to take certain hasty decisions and make mistakes, said Rahul Singh, CIO-Equities chairman of Tata Sons. We also felt that the current market liquidity does not really support the kind of flows which we were getting either in the category or our own fund in the small cap. So we decided to take this decision to stop the lump sum flows but the SIP, STP route will continue. Because what we don't want and which is what is counterproductive for investors investing in mutual funds or especially in small cap mutual funds, there is a significant increase in inflows that forces the fund manager to make certain hasty decisions and make mistakes. We want to avoid that scenario, Mr. Evgeni said. We want to calibrate the flows to the extent we can deploy, and I think that is something which we think is ultimately in investors' interest over the long term. This is not to say that we are experiencing significant euphoria or a significant bubble kind of a situation this is not that message. But this message is a message to say that the extent of flows were not being matched with the extent of liquidity or the opportunities we were getting so we want to match the two. This is the main objective of taking this decision. What we are seeing clear is that India is in a sweet spot with some kind of soft landing in the developed markets. We are not seeing a crash landing of the economy. We are seeing a soft landing, which is a sweet spot for India because commodity prices remain under control. Our macro parameters remain in control and the corporate sector is in the best of its health it has ever been in terms of leverage. The banking sector is in the best of its health, especially if you compare it to developed markets or China, so all that is getting baked into the premium and not just short-term momentum. How much that premium should be, whether it should be 10% above fair value or 60% above emerging markets or 80% above emerging markets is not a perfect science. There is a little bit of valuation premium that has got baked in because of these factors, but we don't yet see that it is completely unjustified or unsustainable. There may be a point where I would say that it becomes completely unjustified or unsustainable. This is not that point. We have to do our jobs well as a fund manager to avoid certain regions where we see unnecessary optimism or unnecessary euphoria and to be in those sectors or stocks or companies where we still have valuation comfort and there is room for an upside, he said. So I think the job of an active fund manager becomes extremely important in these situations where valuations are fair value or slightly higher than fair value and therefore bottom up stock picking becomes more important. And to just summarise the whole thing in the context of the fact that the economy is broadening in terms of the parts of the economy which were not doing well, especially pertaining to the investment cycle now beginning to do well. There are more opportunities coming up in sectors or segments or stocks that have not done well in the past 10 years or in the past decade. I think if you put a combination of all these things, I think it is still a pretty interesting market to try and create alpha despite the headline valuations not being supportive. Banks have had a perfect scenario in recent times, he said. Some of that is getting diluted with NIMS potentially coming under pressure. But the credit quality or the asset quality is still very-very strong. The growth is still continuing at a fair rate and typically what you have seen is that any asset quality issues come after three or four years of such high growth or high credit growth. But we are far away from a potential bad asset quality cycle. So if you look at in that context the valuations for some of these banks, including the private sector banks and PSU banks, are still in the reasonable zone. They haven't reached more than the fair value. The stock is not trading at higher than their historical valuations, except a few stocks. So there is room for alpha in banking as in general. And also over a period of time because of the systems and processes being put in place by RBI and the banks themselves the difference in the asset quality between the best bank and the worst bank which used to be there say five years back or ten years back that difference will also be lower or lesser when the next asset quality cycle comes so all that is getting reflected in not just PSU banks but also in the performance of the small midsized private banks also.