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Ved Prakash Chaturvedi, MD of Tata Mutual Fund has observed that whenever there are large NFO collections in mutual funds, there has been a front run rally in midcaps. “It is not merely a coincidence that it (rally in midcaps) is happening at a point in time when the mutual fund industry is raising a large amount of money through maybe 8 or 9 NFOs. I find it difficult to believe that it happens time and again, whenever you have large NFO collections from mutual funds,” he said.

Excerpts from CNBC-TV18’s exclusive interview with Ved Prakash Chaturvedi:

Q: Markets are almost within shouting distance of all time highs and midcaps are leading in this time around, how do you expect the next couple of months to pan out?

A: Over the past couple of years, whenever there has been an anticipation of large collection in mutual funds and when 8 or 9 large fund houses have come out with NFOs in the market at the same time, a lot of front running in midcaps has been seen and which is very interesting. I have been saying that whenever there are large NFO collections in mutual funds, there has been a front run rally in midcaps. We may be seeing some of that happening right now.

Q: You are saying you are not quite convinced by this big upmove in the midcap space and you think it might be ripe for a bit of a correction?

A: No, I am not saying that. I have said before that midcaps is where action will be in the future. So I am not for a moment saying that. I think the value gap is closing and I think clearly action is shifting to midcaps from largecaps and valuation gaps are significant.

All I am saying is that it is not merely a coincidence that it is happening at a point in time when the mutual fund industry is raising a large amount of money through maybe 8 or 9 NFOs. I find it difficult to believe that it happens time and again whenever you have large NFO collections from mutual funds.

The other point I would like to make is about the domestic retail participation. We are doing a study on the number of demat accounts that have been opened in the last one year and the last six months and also the number of additions of individual investors to mutual funds and to ULIP plans of insurance companies and if you add all this, it is a humongous number.

Indian market sees great upsides is when the Indian investor starts buying. I think some of that is happening now either directly or through ULIP plans or mutual funds and I guess some of that is really happening in the midcap segment. So my sense is that it is a combination of all this and it is all very good for the market, quite frankly.

Q: You see more upside in the near-term?

A: Let us look at the dark side, elections will start looming as we go into 2008; oil is still at USD 90 per barrel, which has always been bad news for India; the US sub-prime issues will keep coming in. There is some slowdown in the domestic economy. Given the stretched valuations, upside at least in the largecaps counters is now limited. The flow through issues relating to Sebi guidelines on P-Notes will have their impact. They have not yet had their impact. That impact will be felt over 2008. At the same time, there is fantastic amount of interest in India.

If the risk love for developed markets comes down chances are that some of the money flows will come to India and I guess that would remain good cheer. However, on the valuation front for the largecap counter, I think there would be a correction and sooner than later, we would see somewhere around the long-term median valuations coming back to the market again.

Q: What has the call been as a fund on the entire power space?

A: We were among the original fund house to be extremely bullish on the entire infrastructure sector including power and for the past three years we have been riding the infrastructure boom and power has been a very important part of our portfolio. We continue to be very positive on the infrastructure space. We still feel that five years from now when we look back on this entire period, infrastructure would have been the best performing sector in the market.

Q: What have you made of the resurgence of interest in IT, is it a good time to start buying or would you want to see what this quarter’s results show up?

A: Absolutely, we feel that the fundamental growth of IT companies has been good. We have felt that the entire rupee thing will ease out a bit; I think it is already easing out and the fundamental story will come back. Look at the divergence in performance; it is astounding, isn’t it? I was at a hedge fund conference in Singapore a couple of weeks back and I gave the example of the valuation that the infrastructure sector had in 2001 and the relative valuations that IT sector has in 2001 and their relative valuations today - to make a case for why India is ideal market for hedge funds. There is so much divergence in performance between these sectors in these two periods, isn’t it?

Source: Moneycontrol.com