WF: We have seen close to US$ 3 Bn of FII outflows in the last month or so - on the back of newsflow about Greece, Dubai and China - and the Sensex took a 2000 points knock from this. What is your perspective on these international events and how concerned should we be from a domestic market perspective?

Jayesh Shroff: On the global news, I think the biggest news floating around right now is the problem in Europe - primarily Greece and to some extent Portugal and Spain. The main issue is that the lid has been blown off the European problems. Europe was a holy cow - now that's broken. Fiscal deficits in some of these countries is running at a high 12% of GDP.

Having said that, I don't think we will see any sovereign default. The EU will come to support these countries - Germany and France are quite capable of bailing out these smaller EU members. Germany has already made some announcements of financial aid. Of course there will be some conditions on controlling expenditure - which can have local political implications.

Closer to home, the Dubai problem is again re-surfacing, because they have not been able to close discussions with their lenders and repayments are coming due now. Here again, we have to keep in mind that Dubai is part of the larger UAE block and ultimately it is reasonable to assume that Abu Dhabi will support Dubai - again with some conditions etc attached. I therefore believe that the prospects of actual sovereign defaults are quite low - although there may be bouts of nervousness before these issues are resolved.

In the run up in our markets, a lot of money came through ETFs - which I believe is largely non-institutional money that came here and to China in he quest of superior returns as compared to their home markets. Some of that money has gone back - at the first sign of volatility and the threat of sovereign defaults. There has also been a build up of short positions by FIIs in the F&O market.

I think what had to go out in terms of ETF outflows, has probably gone out already. The problem now is that while a number of FIIs are optimistic about the India story, not many are willing to commit money now - ahead of the budget, ahead of any announcements on the fiscal deficit, reforms, divestments etc.

The other issue is that the shorts that have been built up by FIIs in the derivatives market can have some impact on markets if they come to sell in the cash market and square up their shorts. But then, squaring up of shorts can limit any downside of sales in the cash market - and therefore can neutralize its impact.

Overall, I don't think there is much to be really worried about for our market - from these events. They create short term volatility - which are good buying opportunities.

WF: On the domestic front, people are worried about the Budget, about inflation and about withdrawal of fiscal stimuli. How real are these concerns?

Jayesh Shroff: First on the budget : the statement you made that there are some concerns on the budget about roll back of fiscal stimuli and stuff like that - that actually is very positive for the market. That's because we are getting into this budget season without any expectations. And whatever expectations are there they seem to be on the negative side. There is a good chance therefore that post budget, markets can be in a positive frame of mind.

Regarding the fiscal stimuli, these were given to stimulate the economy. Considering the IIP growth and GDP numbers, I think you have sufficiently stimulated the economy and now the government needs to look more at the fiscal deficit part. Taking away of the stimuli I think is largely priced into the market now. Any reforms that the Government may announce will be positive for the markets. So, these are not real concerns for me.

My very near term concern about markets is of liquidity in the system. We are already seeing the 10 year close to 8% levels. CP's have also moved up 200 basis points in the last few days. Post CRR hikes, there is perhaps around 40000 - 45000 crores of liquidity in the system. This year since the corporate performance has been good, the advance fixed payment would be higher. So that will suck out large part of liquidity.

Then you have REC opening on 19th Feb and then you have NMDC in first week or second week of March 2010. Both of them put together would be close to 15,000 to 18,000 crores. You have a deluge of papers or supply coming in the market, which will suck out liquidity - at a time when system wise liquidity is anyway going to be poor in March.

Mutual fund flows have been very muted. Even insurance flows are below expectations, I am told. And FIIs are currently on the sidelines, as we have discussed. So the very short term issue the market may face is of liquidity - there don't seem to be too many buyers in the market to absorb fresh supply and keep markets buoyant.

I am personally therefore a little cautious about the market for next couple of months. On the flip side, if markets do correct due to the liquidity situation, there are a whole lot of investors - in India and overseas - who are waiting to enter the market. That should help cushion any temporary falls.

Overall, I believe that concerns are largely in the very near term. For corporates, this is going to be the year of execution. We should see better offtake of credit from the banking system, execution of large infra projects and construction projects. Companies that stay focused and execute, will report good earnings growth and the market will react positively to this.

WF: You talked about being little cautious on the near term, some fund managers opine that we could see a relatively large trading band this year - between 13,000 and 20,000 for the Sensex. Do you subscribe to this or do you think markets may not fall to that level, even temporarily?

Jayesh Shroff: I am more a follower of direction rather than numbers, but I think the range is likely to be broad - I may be inclined to be of the camp which says 13,000 to 20,000. As mentioned, my only concern is liquidity over the next couple of months - and any dips will give great buying opportunities.

WF: How have you positioned your Magnum Taxgain Fund in light of this overall market view?

Jayesh Shroff: As I said, I am at this point of time a little cautious. Earlier, we were fully invested - now I have created a small cash position - around 7% to 8% of the portfolio. We are also a little defensively positioned right now - but do plan to reverse this in the near term, as soon as possible.

WF: Which are the sectors you would like to be overweight in?

Jayesh Shroff: As I said, this is a year of execution - to that extent infra is the sector to be in and at some point of time I would also increase our weight in banking. I am a great believer in the domestic consumption story and am particularly keen on consumer non-durables. I am not too bullish on commodities except maybe steel.

WF: As a fund manager, you manage an open ended fund as well as an ELSS product that comes with a 3 year lock-in. Is there any material difference in the way you manage ELSS products versus normal open ended product.

Jayesh Shroff: Primarily, as a fund house we have a philosophy and a process and we follow that. As a fund house, we take the pride and say that we are bottom-up stock pickers and we follow that across all the funds.

Having said that, one advantage in ELSS is that it is a 3 year lock-in, a fund manager has got that much room to take a look at the business from slightly more longer term perspective and build up his portfolio accordingly. There is more room and flexibility to build a great long term portfolio.

WF: ELSS collections this year have been very muted. To what do you attribute this apathy?

Jayesh Shroff: I think ELSS funds are a great way for investors to save tax and create wealth. I can't think of many better options for investors to enjoy these twin benefits.

The reality however is that like all products, sales is a combination of customer pull and distributor push. Maybe, the push factor is missing this year - due to all the regulatory changes in distribution. I am however not a distribution expert and may not be able to give a deeper insight into this. All I can say is that ELSS products are excellent investment avenues for retail investors. With the India story looking in great shape over the net 3 years, distributors who recommend ELSS funds such as our SBI Magnum Taxgain to their clients, should be able to help their clients grow wealth sizeably over the next 3 years.