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Indian Economy Has Evolved And Many New Sectors Like Logistics, Fin-Techs, Etc Have Opened Up: Rajat Jain, Principal Mutual Fund

In an exclusive interview with BW Businessworld, Rajat Jain, Chief Investment Officer, Principal Mutual Fund talks about the company and more.

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What is the rationale behind launching a Mid Cap fund at this time? Do you see the “darkest hours before dawn” theme playing out in this space anytime soon? 

While the front line indices like S&P BSE, Sensex and Nifty 50 are making newer highs, the mid and small cap segments of the markets have seen a lot of volatility in the last few quarters. They have under performed the narrow large cap indices as select large cap stocks have driven the markets higher. In this period, the relative overvaluation of the mid caps over large caps has corrected and now the mid cap indices are trading at a discount to the large cap index. Over the past quarter we have seen the breadth in the markets improve and smaller large caps and mid caps have also been part of the rally. The attractive relative valuation of mid caps coupled with the strong fundamental story behind many mid cap stocks and the improving breadth in the markets make it a good time to launch a mid cap fund. 

At a sector level, what kind of mid caps are you bullish on right now? 

With regard to the Principal Mid-cap Fund, we will follow a bottom up approach to stock selection and will aim to build a diversified portfolio across sectors. Many Mid-cap companies are leaders in their own niche segment and have a strong connect with the end consumer or are often significant part of the supply chain to large cap companies. Potential opportunities in mid-caps would be in companies which are seeing earnings growth better than consensus, companies undergoing business transformation or restructuring to re-focus their business on the high growth areas, companies focussing on value migration leading to improving margins or those where intrinsic value is being unlocked as a result of corporate actions etc. Lastly, as the Indian economy has evolved and many new sectors have opened up like, healthcare, movie exhibition, logistics, fin-techs, etc.; these also provide good investment opportunities.

When do you see consumption numbers actually picking up? What about tangible earnings growth? Do you think mid caps are fairly valued right now? 

We believe that in the near term, consumption is unlikely to rebound. However, with the good monsoons, notwithstanding the floods in certain parts of the country, we expect a good Rabi harvest. This, coupled with higher agricultural prices and government spending in rural areas could create potential for consumption spend especially in the rural India. 

Over the past quarter we have seen the breadth in the markets improve and smaller large caps and mid-caps have also been part of the rally. Relatively attractive valuation of mid-caps coupled with the strong fundamental story behind many mid cap stocks and the improving breadth in the markets make it a good time for expecting a rally in this segment.  

As a fund, do you intend to be 100 per cent true to label, or do you plan to hold some large caps in your portfolio too? What about portfolio concentration – will you go in for a diversified or focussed strategy? 

The fund is mandated to invest at least 65 per cent of the portfolio in mid-cap companies. We expect mid cap companies to be about 70 per cent to 80 per cent of the portfolio. The remaining allocation maybe deployed in tactical opportunities and attractive opportunities available in large and small cap companies. Diversification and management of risk is an integral part of the investment management process. We will endeavor to have a diversified portfolio of 50 to 60 companies.   

Lastly, what would your advice be to an investor who has been fence-sitting out of the market for the past couple of years? Is it time to invest aggressively or is a more measured approach warranted? 

Historically, equities are known to be wealth creating avenues for patient investors. Mid-cap stocks have created value for investors who invested in a portfolio of quality mid-caps when valuations were reasonable and who held their investments through the cycle. Investors who are investing for the medium to long term and who are comfortable with some volatility should consider investing in mid-cap funds. The proportion of allocation to mid-cap funds should be based on the investors’ risk appetite, financial goals and investment horizon. SIP or STP is an appropriate route for investing in mid-cap funds if an investor wishes to stagger their investments.

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