Mr. K.N. Siva Subramanian is the Senior Vice President and Portfolio Manager- Equity, Franklin Templeton. Mr. Siva Subramanian joined the erstwhile Pioneer ITI AMC Ltd. in 1993 and presently manages Franklin India Bluechip Fund, Franklin India Prima Fund and Franklin India Opportunities Fund among others.

In an interview with Personalfn, Mr. Subramanian discussed a wide range of issues from the Indian economy, investing in mutual funds, the options available to investors to the relevance of financial planning.

Pfn: Where do you see equity markets heading over the short-term and long-term?

Mr. Subramanian:Overall, we are optimistic about the direction of the markets over the medium to long term. Economic growth is expected to improve demand for goods and services across sectors and this should lead to better profit growth for the corporate sector. Global investors are positive on emerging markets in general and India in particular given the superior growth of these economies vis-à-vis the developed economies over the next few decades. And given the low equity ownership amongst Indian households continues to be very low, this trend seems to be changing on the back of the buoyancy in the stock markets and declining returns from traditional savings avenues, combined with various tax reforms undertaken by the government. If the proposed pension reforms are implemented, it should give a further fillip to the domestic markets over the long term.

However, high oil and commodity prices can impact growth if they persist at these levels for a prolonged period of time. While corporate India is expected to grow at a good pace, one should not expect the same level of performance in FY06 due to the higher base of FY05. Any sharp rise in global interest rates would affect global fund flows into emerging markets like India over the short term.

Pfn: What is your view on the economy?

Mr. Subramanian:The Indian economy appears to be entering into a higher trajectory of growth. While growth has averaged 5-6% in the past, the reforms initiated during the 90s have improved the business environment and we believe that the Indian economy should be amongst the top 5 economies over the next 25 years. The latest economic data has reinforced our view that capital formation is on the rise and the manufacturing sector could start witnessing capacity additions in the future as demand picks up.

Overall, the economic fundamentals are strong with various drivers such as infrastructure spending, retail lending, positive demographics, outsourcing opportunities and a potential capex recovery, in place. One of India's key advantages is that it does not rely excessively on external demand as a source of growth. As a result, India has much better balance in its growth model than the rest of the region - giving it a built-in macro resilience that other Asian economies lack.

Pfn: Over 3-5 years, what kind of returns are equities expected to deliver (on a compounded basis)?

Mr. Subramanian:With real industrial growth expected at around 9%, corporate profit growth will probably average over 15% over the next 3-5 years. On a 1-year forward basis, the Sensex is currently trading at less than 12 times. Given the backdrop of the economic growth entering into a higher trajectory and the fact that almost 80% of India's economy is domestically driven (and therefore less impacted by global factors), Indian equity markets offer a good investment opportunity from the medium to long term perspective.

Pfn: How should retail investors determine their risk profile?

Mr. Subramanian:While there are enough tools to help investors determine their propensity for risk, broadly, they need to ask themselves - a) Am I comfortable with the volatility in a particular asset class? Would I rather invest in avenues that provide steady returns (albeit lower) or those instruments, which tend to be volatile over the short term, but have the potential to deliver higher returns over the medium to long term. Also critical is the investment horizon, as even a high risk taking investor might not want to invest his/her short term surplus in securities that are volatile in nature.

Pfn: What is the ideal time horizon for someone who is looking at investing in equities? Will this time horizon vary in case of large & mid cap funds?

Mr. Subramanian:Typically we advocate an investment horizon of 3-5 years for equity investments and this would not typically change for different equity funds. Having said that, investors who are looking to invest in mid cap funds should be aware of the additional volatility in the segment and should be comfortable with the risk-reward trade-off.

Pfn: How should investors evaluate a well-diversified equity fund? How should investors evaluate equity fund managers? Please share with us the 5 most important things one should look at.

Mr. Subramanian:The decision to invest in equity funds should be part of a well-crafted financial plan. Once the plan is in place, the key things to look for while investing in any mutual fund scheme are

• Track record/experience of the fund house

• Stability of the investment team/investment process

• Consistent performance across market cycles and relative performance among its peer group (across time periods)

• Transparency and service levels

• Investment style/process (whether it suits the investor's risk profile and if the fund sticks to the described process)

Markets go through cycles over time and a well-crafted financial plan helps investors to weather this volatility over the long term. Research has shown that the probability of attaining financial goals is much higher by following this approach, rather than by trying to juggle around with investments, and time market cycles.

Pfn: In recent times we have seen a sharp disparity in the performances of large cap and mid cap funds. Over 5 years how do you see them facing off against each other?

Mr. Subramanian:While valuations in the mid cap segment have re-rated substantially relative to large cap companies during recent times, further movement in stock prices will depend on performance and profit growth of individual companies. Given that the universe of companies in the segment is vast, it is difficult to assess the sustainability of the current rally in mid caps, but investors need to be aware of the volatility in the segment. One needs to keep in mind that on a bottom-up basis there are quite a few companies across sectors with good fundamentals that have long term potential, but at the same time the rally has also seen not-so-good companies benefiting from the increased interest in the segment. We believe that over time, fundamentals will assert themselves and some stocks with weak fundamentals, which have benefited by all-round buying, will witness correction. We don't expect mid cap funds to exhibit the same level of out performance over the medium to long term.

Pfn: How should a high-risk investor allocate his investments across large cap and mid cap funds?

Mr. Subramanian:While this would depend on the individual, broadly the allocation could be 30:70 (large cap:mid cap).

Pfn: What is the rationale for investing in sector funds for an individual who does not understand the intricacies of the sector? Also sector funds tend to perform in spurts, which means investors have to keep redeeming their units at regular intervals to make money. Your views...

Mr. Subramanian:Sector funds are suitable only for those investors who are ready to take the non-diversification risk and any investment decision in sector funds should be arrived at after careful analysis of the financial situation, risk tolerance and timeframe by the investor. Investors who like the risk/return equation of a particular sector (based on their analysis of the sector) but do not have the time to construct & managing a portfolio, will also find sector funds appealing.

Investors must remember that sector funds provide the opportunity to invest in one area of the market. But if that strategy is used as the sole means of achieving higher returns, the investor must be willing to take the risk that accompanies the possible return.

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