A. Balasubramanian, CEO, Birla Sun Life Mutual Fund spoke to Business Line on the sidelines of the launch of the AMC`s India Reforms new fund offer.

Bala, as he is popularly known, explained the new fund`s theme and shared his opinion onother issues such as disinvestment, the possible direction for the broad markets and the mutual fund industry.

>What are the reforms you anticipate in the immediate future?

Financial sector reforms such as FDI in the retail and insurance sectors will gain more prominence. The power sector and rural infrastructure will also, in our view, receive greater thrust. The funding pattern is clearly changing and the availability of land to operators is also being ensured by State governments.

Of course, there must be earnings visibility for companies and shareholders after these reforms. Telecom is a sector where there have been reforms (3G auction). But the sector as a whole does not have earnings visibility and may not present money-making opportunities.

>Is the way we are positioning disinvestment flawed, in the sense that the government seems to be saying ? We have a deficit, so we are selling assets to bridge it` rather than seeing it as a strategic asset sale that could create wealth?

Fiscal deficit can be addressed in two ways. One is increasing tax revenues. Increasing taxes may not bring our economy the necessary benefits. This is because it will not encourage spending from consumers and the consumption-led theme will not gain momentum as it will not put more money in the hands of people.

Having said that, for India, with its high fiscal deficit, we need to move to a different platform and make a one-time correction.

PSU divestment, in my view, is the best way for the Government to carry out the reform process without losing control over the company; this will make them more accountable, and listing in the exchanges will improve corporate governance. It also improves operating efficiency; profitability goes up and creates value for shareholders. Funding of any future expansion of these companies can be done through the capital markets and not by the government. This creates wealth for the government and all shareholders.

>Is disinvestment crowding out other IPOs?

Crowding out is only a function of sentiment in the market. Everything depends on the attractiveness of the issue price, the business and its sustainability. There must be visibility in terms of generating profits for these companies. Is there money in the system to support these IPOs? In our view there is lot of money in the system, which can flow into the capital market through the IPO route.

>What is the possibility of a rating upgrade for India on the back of the improved fiscal deficit?

The probability of rating upgrade is very high because if you look at the 3G auction alone, it is more than what the government expected. If it is also able to meet the PSU divestment target of Rs 400 billion by this year, the fiscal deficit targets will be surpassed by the government. We also expect corporate earnings to be supportive, which means that tax revenues may also be buoyant. If these three factors work, then why should not S&P look at upgrading India?

>Mid-caps trade at a discount to large-caps. To that extent do you see them outperforming, or do you think that gulf will remain?

It is very difficult to say. Our belief is some of the mid-cap companies would become large-caps.

That means that discount will be a function of what size and scale they operate at, what kind of earnings they provide and, third, what kind of floating stock is available that would encourage more and more investors to participate. If these three factors become clear, then the discount will get narrowed.

Our belief is that in India mid-caps provide a huge opportunity. That is one space which offers entrepreneurial opportunities to people, and the government is increasingly becoming a facilitator by accelerating reforms.

Mid-caps will have earnings growth, but they will trade at a discount.

Individual companies may enjoy a premium, based on their ability to scale up.

>Which sectors are expected to outperform going forward?

Our belief is that banking and financial services, engineering, construction and capital goods will do well. Private sector expansion could be the trigger for capital goods companies growth. Today, private sector expansion is coming back only gradually.

For the last one-and-a-half years, it was government-led spending. Once we see private sector-led spending pick up, there will be order-book increases and expansion in margins for capital goods companies.

Some companies operating in this space did not have access to long-term funding. The government is now looking at the funding pattern so that operators can easily access funds for the long term.

We also believe that domestic pharma companies will continue to do well.

Auto, auto ancillaries and commercial vehicle manufacturers will be the biggest beneficiaries of the economic revival.

We are bullish on IT as well. It is only a question currency management and how companies are able to hedge.

But telecom will be weak; real-estate and textiles will probably be neutral.

>Commodities rallied till early this year? Will there be a sharp correction?

The rally of commodities will depend on the demand and supply situation. One good thing in the last one or two years is that companies did not have to build capacity.

Crude is also behaving in an orderly manner. Though there may be speculative activity, it may not drive up prices. We are also not seeing a significant recovery across the markets globally.

We are not seeing something happening that could drastically alter the demand-supply situation.

PSU divestment is the best way for the Government to carry out the reform process - retaining control over the company but making it more accountable. Listing in the exchanges will improve corporate governance and create value for shareholders.

>Equity funds have had a very small net inflow in FY10, much lower than small-savings schemes. Why have investors chosen to stay away in a rising market and moved to safety? Has the industry, so dependent on distributors, been affected by the removal of entry load?

Regulatory changes have made the business-model undergo a change for both the fund house as well as the distributor. Once a long-established model for distributors undergoes a change, there is bound to be a period where it remains slack.

At the end of the day, is there enough money in the system? Yes there is. Are people fully aware of investing in equity products for the long-term? They may or may not be. Because of this lack of awareness, the inflows have not been great. At the same time, as the distributor`s business model was changing, the push they gave products was missing.

Despite all this, there have still been positive net inflows. But the quantum could have been greater.

My view is that Indian investors have lost the opportunity in the last 1.5-2 years while the global investors have put in money.

Indian investors have to realise that, instead of timing the market, they should look at investing in markets through ongoing, continuous SIPs and STPs for the purpose of long-term wealth creation.

>There has been a revival in the NFOs launched in recent months. Do you see that continuing, especially ones that target large sizes?

The way we see it is that NFOs help from two angles. One, in expanding the market. We can reach out to the mass population. Second, it also helps in waking up financial advisors who are not very active. NFOs inflow is also a function of what the gap is. Is the theme right? Is it reasonable? Is there a overlap, if so to what extent, and so on. I always look at it from the point of what is the difference between the existing schemes and the NFO. If it is more than 25-30%, then it is worth launching. The whole of last year had few NFOs, as we did not see any merit in it.

For me the existing business is also very important and has to grow at 60-65%. Every fund should have scale. Fund managers like more money in their schemes.