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For next 3-5 years, midcaps and smallcaps hold a lot of promise: Pankaj Tibrewal, Kotak Mutual Fund


Do not be invest completely in either largecap or a multicap fund; do not be 100% in a mid and smallcap fund but have a disciplined asset allocation policy, Pankaj Tibrewal, Fund Manager, Kotak Mutual Fund, tells ET Now.

Edited excerpts:
Markets are at record high. Should one hold on to their midcap portfolios? Also, can new investors start looking at SIPs in midcap and smallcap space?

The market is at a very interesting juncture and it is a role reversal from last year. Last calendar year, you saw midcaps and smallcaps outperforming the broader market and 90% of the BSE 500 companies gave a positive return. But when you look at this calendar year, the mid and smallcaps have underperformed massively. The gap between the smallcap index and Nifty is about almost 20% plus and the gap between midcap and the Nifty is about 15-16%. The situation is such that on a year, two-year and almost on a three-year basis, the midcap index is underperforming the largecap or the Nifty indices. A larger part of that has been done away with.

In the last few days we have seen the breadth of the market improving and clearly that shows that the earnings growth which in the first quarter came in was inspiring and we believe that from here on, the broader market should do much better rather than the market being driven only by 10-12 Nifty stocks.

We always ask new SIP investors to follow a disciplined asset allocation policy. Do not be invest completely in either largecap or a multicap fund; do not be 100% in a mid and smallcap fund but have a disciplined asset allocation policy. We believe that for the next three to five years, the midcap and smallcap segments hold a lot of promise.

There are a lot of companies with great management and great brands which will become the largecaps in future and if you are a disciplined investor, the space can generate a lot of returns.

Since 1999, when midcap Nifty index 100 was formed, if you did a Rs 2,500 SIP monthly, that amount today would have moved to Rs 40 lakh plus. If you would have a 10% topper every 12 months, that Rs 2,500 SIP every month would have been Rs 65 lakh today.

The power of compounding which is at 17-18-20% can largely come from this segment. We advocate disciplined asset allocation and after the underperformance in last eight months, today is the right time to look into the segment where people are not looking at now.

Looking at a couple of your top 10 holdings, there are a lot of names from the infrastructure, construction and capital goods space. Is that a space that you are particularly bullish on or are there other baskets within the broader market that you would like to advise your clients to look at now?

Kotak Emerging Equity, which is a midcap diversified fund and the top few holdings are also the private sector financials. We believe that in the industrial space and especially the light industrial space of bearings and pumps, the cycle is changing for good.

All the companies we are interacting with over the last few months, have been complaining about capacity constraints. The demand momentum has been strong. In cement, we are running at almost 75-80% capacity, in steel, we are running ahead of capacity in the country today.

A lot of places where there was excess capacity are going to fill up because the construction demand has been very solid led primarily by government infrastructure projects. We believe private will sector follow and hence the cycle is changing at the margin. If you take a two, three or four-year call, we are not saying it is the 2003-2008 cycle which is going to repeat but there could be a significant momentum in the industrial cycle going forward and hence our bias towards that But the portfolio is largely diversified. It has a mix of speciality chemicals, private sector financials, cement, some niche construction companies and bottom up pharma names as well.

It is a broad-based portfolio and we believe that over a period of time, a broad based portfolio in midcaps works out far better than a concentrated one.

How are things looking in terms of sustainability of the DII flow? How do you think the SIP flows or the overall flows in the market would continue?

It is a great time for India as a country. Three-four years ago, if I told you that in five years rupee would be touching 70, trade deficit at $17-18 billion a month and ask any of you to predict the market levels, everybody would have said that markets would tank big time because FIIs would withdraw money.

Three or four years down the line, we are at a situation where rupee is at an all- time low, trade deficit macros are not very favourable but markets are at all-time high. That is predominantly because domestic investors have become a dominant force in the market.

Believe me, every week I get a couple of calls from global guys trying to understand the domestic situation on the ground in terms of flows. So, we have come a long way in terms of flows. Whenever we speak to retail investors, they believe SIP is the way to go and we have not seen any moderation at least at Kotak and even at the industry level from a flow perspective on SIPs.

The lumpsum and the overall flow which has been Rs 18,000-19,000 crore a month, has moderated to about Rs 8,000-9,000 crore but that is okay because three years you had a great run in terms of flows. Over a period of time, you need to consolidate but SIPs in my view will be a dominant force and will protect investors like us from the downside of erratic foreign fund flows. It is a great moment for India.

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