WF: Markets seem to be struggling to go beyond the 17000-17500 range. Valuations are now over 20X current year earnings. Retail investors have been consistently redeeming equity MF investments over the last 4 months. Do you think fears of a significant correction are justified? What is your message to advisors who are struggling to get investors to buy into the market at these levels?

Nilesh: Lets first look at the market and then look at the investor behaviour. Markets have bounced back and are now trading at the higher end of the fair value range. At 17,000 they are not cheap as they were in March 2009. If markets are trading at the higher end of fair value, its because

1. last year they have gone substantially below their fair value - which has caused the bounce back.

2. There is optimism about the Indian recovery and growth story - which is looking more robust than the rest of the world.

3. The most important is the liquidity flows. If FIIs had not pumped in 17 billion dollars between March till today, then surely market would not have been at     17,000.

So, liquidity, optimism and a bounce back from a sharp downswing have together pulled markets up to the higher end of their fair value. You could say that probably valuations are running ahead of the fundamentals. Now in this kind of scenario what should an investor be doing?

1. If you are overweight equities in your portfolio - which is unlikely to be the case - you should book some profit and reduce your overweight stance in equities.

2. If you are slightly underweight by equities, probably you can afford to stay underweight equity for the time being and say I want to time the market and if my     call is right, I will invest in a correction in the coming few months.

3. If you are hugely underweight equity, you have no option but to do a systematic investment plan, and gradually increase equity exposure, knowing fully that     there could be 10 to 15 % correction somewhere down the line.

So your call to invest in the market is not linked to the market valuation, it is more linked with your current portfolio allocation level in equities.

The other aspect I do want to share with our advisors and distributors is the importance of getting their clients to invest regularly and not in lumpsums. Many investors invested in equity funds between 15000 and 21000 levels in the last bull market - but very few investors have invested between 8000 and 13000 levels this year. When I meet investors, many of them tell me "I have invested in your fund in September 2007 and even today it is below its acquisition cost". When I ask them why they refrained from investing in Oct 2008 or Mar 2009, they tell me that they didn't have the money at that time. I've told many of them that this simply is not true - as a a salaried person - you cannot make such excuses. Please put your hand on heart and say that you don't have money. And then most people accept that and fell sorry for missing opportunities. I keep telling investors that if you decide to invest only at one point in time and hope that your fund manager will be able to deliver the returns all the time, this will not happen.

You have to average yourself when the markets are cheap, and book profits when markets are expensive. It is our job to outperform market benchmarks - but it is the advisors and investors responsibility to review their asset allocation periodically.

WF: Considering that most investors continue to invest in lumpsums, do you think the trigger based products that the fund industry including yourself have launched are a partial solution - though not the most efficient one?

Nilesh: Our trigger based fund was conceived around Oct 2008. Nobody can precisely predict market levels. By July 2008, markets had corrected to 14000-15000 levels - we thought this was a fair value and asked investors to invest. Then Lehman happened and the market dropped all the way to 8000. Now, in spite of making emotional and rational pitches to investors that this is your life time opportunity to invest in equities, that you can't get India so cheap and that the world is not going to come to an end - we were unable to get any response from investors in terms of money. To address this issue we launched the trigger based funds where with every rise, you will be booking profit and moving to debt. In that environment, it probably was the best.

Trigger based funds meet a specific need and should not become a replacement for your mainstream core portfolio funds . Your core equity portfolio cannot be replaced and must have some large cap, some mid cap etc. This target return fund is an additional feature where you know you want to take advantage of returns by booking profits. But if you keep on booking profit too early in your portfolio it will all be in debt and you will be significantly underweight equities. This is a side product that is a portfolio value add, this is not a core product. This is more meant for those retail investors who want to book profit at various level and then move back into liquid.

WF: Back to the state of markets : one of the big worries from an economy perspective is inflation - fueled by galloping food inflation. Markets are anxious that RBI will suck out liquidity and increase interest rates - which can impact debt and equity markets. To what extent are these fears justified?

Nilesh: First of all lets ask ourselves whether we think the RBI is a doctor or a "prosecutor ". My view is that RBI is a doctor and amongst the best in the world. Central Banks the world over have been nursing their economies back to health by administering a mix of medicines. RBI has done a better job than most. No good doctor is going to take drastic steps that kill the patient. Lets respect the doctor's judgement - when he will remove the intravenous fluid, when he will stop the medicines, when he will allow the patient to go home. And in the recovery process, sometimes there are after effects of medicines which may result into to headaches or temperature?but, we must see it in proper perspective.

So let's agree that RBI knows what it is doing. Inflation can be tackled to some extent by raising rates and tightening liquidity but on the other hand, is it not better to give liquidity capacity and create supply and control inflation? For many years in the past, we have tightened liquidity and raised rates to control inflation by cutting curbing demand. Now is the time to experiment : we can create supply, create capacity, by providing bank credit, by providing liquidity and meeting the consumption demand.

So my feeling is that we can handle inflation surely by mix of both the things. My feeling is that, yes inflation is going up significantly but that is not something which is a cause of concern. The market has priced all those things reasonably well.

WF: Moving on to the global side, we are now seeing some amount of strength in the US dollar in recent days - and some analysts are calling for a trend change from a declining dollar environment. How concerned are you about a strengthening dollar - and its implications on the dollar carry trade and the risk trade that has been fuelling markets around the world? How might that impact our markets?

Nilesh: Lets review the whole thing in a holistic basis,

1. Is the US economy going to recover so much that it can attract capital from rest of the world. The answer is No. Even the Fed governor is talking about interest     rates being held low for a longer period of time, extended period of time while the economy can be nursed back to health.

2. We have all seen the Yen carry trade to continue for a long of 20 years, so why will the Dollar carry trade get unwound in only nine months?

3. At the end of the day, where will the money flow? Will money flow because currency is appreciating in a 0% interest bearing instrument? Or will the money     flow to a market that is delivering a 6 -8% GDP growth when the world is at 1-2%?

So yes, the dollar has depreciated a lot, so it should bounce back to some extent - but I see that as a corrective move rather than a fundamental change.

As long as India can show to the rest of the world that, we have resources, we have consumers, we have entrepreuners, and you give us capital so that we can convert resources into goods and services for our consumers and make profit and I think the world will buy into that story.

There is enough liquidity in the system, which could still flow towards India, provided we deliver on growth. Technically dollar can appreciate for a while - this could have a near term negative impact on our market if some of the dollar carry trade unwinds. These are all short term hiccups, and will not be a long term negative.

WF: Global markets are also concerned that a feeble recovery can be jeopardized by Central Banks sucking out some of the excessive liquidity they infused into markets during the crisis period due to inflation fears. This in turn could lead to a double dip recession in some markets. To what extent are these fears justified and how might this impact our market?

Nilesh: Anyway we don't understand the global market well enough, if people would have understood global market well enough, we would not have seen 100 year old institutions folding up overnight.

I am trying to make an analysis here based on certain facets. Few elements which we have to keep in mind is that the unemployment rate that is running in US is about 10%. Which means that they have to create about 400,000 jobs every month for many years to come. Is that kind of job creation possible? If jobs are not there could it result into inflation, could it result into stronger recovery? My feeling is that today jobs are not being created as in the past because,

1. Demand is weak and hence industries are running at far below their capacity. If industries are running at far below capacity, then how will inflation come?

2. The developed world is suffering because of the excesses which they are took on in terms of lending, in terms of running large deficit, in terms of forgetting the     basic laws of economics.

Our experience of this is, you don't recover from this in a short while. It takes long time to come back to health. It does not happen quickly. Put all those things together it will not be unfair to say that global recovery will not be very strong V shaped. And it will be muted and below par. The recovery in the US has been the weakest in recent history. Global conditions will have a near term impact on our market because we are financially integrated.

As far as India is concerned, from a longer term perspective, if we can get foreign capital, augmented with our savings, convert that additional amount into investments, India's growth is assured . We have resources, we have entrepreneurs and we have consumers, all we are lacking is capital and growth focussed policies. Now if capital is made available by foreigners, all we need is growth focussed policies which allows me to execute projects quickly. As long as we can see the growth focussed policies and execution on the ground, our economy's growth is assured, and as long as my economy growth is assured , corporate profits growth is assured and as far as corporate profits are growing, the stock prices will not have no option but to follow them.

WF: Would it also logically follow that even if the overall quantum of flows may reduce as the consequence of some of these events , India should continue getting sufficient capital to make sure that the machinery is well oiled?

Nilesh: There was a very good report done by Goldman Sachs few months back. In their estimate, Indian savings are good enough to fund the infrastructure needs of the country.

So when we are saving 35% of our GDP, its not a small number. If we allocate those savings well, if we remove the flab from the system and create efficient and faster execution, even without foreign capital, we can turnaround and deliver. Lot will depend upon on ground action and execution effeciency. And if we do well on this front , then flows will automatically come. If we are doing badly then flows will not come.

WF: Finally, in light of your initial comments that market are now trading at higher end of their fair value, how are you advising your own fund managers to align their equity portfolios to what you see as the current market context? Is there any overarching direction you have given to your fund mangers in terms of portfolio stance in your equity portfolios?

Nilesh: Essentially we do not take cash calls. Our equity funds are 90 to 100% invested - so there is not cash call. The year 2009 was most driven by sectors rather than the stocks - a top down approach would have outperformed. 2010 is going to be purely stock specific. The luxury of taking down top down calls for making money is totally gone. One direction to the fund mangers is that we need to focus more bottom up and less top down, rather than more top down and less bottom up. So you have to work hard to pick up stocks which you will outperform the market. The other direction is to now also start paying attention to the possible downside and not just look at the upside potential. Markets are no longer cheap - so a strong focus on valuation is necessary in addition to a focus on growth.