20th December 2011

WF: Equity confidence is badly shaken - and it seems to be more internal rather than external issues. CLSA's Chris Wood talks about a worst case of Sensex at 11,000 and the rupee at 60 to a dollar. What is your prognosis for equity markets in 2012 and what are likely to be the key drivers?

Rajiv: The recent weak stock market performance has led to poor sentiment towards equity investment. The Indian economy is in the midst of a slowdown driven by high inflation and interest rates. We expect the economy to start recovering as the rate cycle reverses. Similarly equity markets will recover as markets begin to discount an economic recovery. In the interim, investors should look to build portfolios as markets have gotten significantly cheaper over the course of 2011.

WF: Is 2012 likely to be the year of the income fund? What is your prognosis for fixed income markets in 2012 and what are likely to be the key drivers?

Rajiv: A slowing economy and falling inflation leads us to believe that yields will continue to drop going forward and income funds offer investors good opportunities in the year ahead. We have already seen 10-year benchmark yields decline from the 9% mark closer to 8.3% and going forward expect to see further decline in yields. As falling yields translate to higher prices, we expect to see fixed income funds perform well in this environment.

WF: It appears that with heightened volatility being the norm of the day, the case for hybrids just gets stronger. What are your plans in 2012 to further strengthen your position as a leader in this category?

Rajiv: At Axis Mutual Fund, hybrid products that combine multiple asset classes like equity, fixed income and gold have been a key focus area. We have been recognized by The Asset Asia magazine which has awarded us the Highly Recommended Investment Product, Retail for Axis Triple Advantage Fund. What gives us greater encouragement is the recognition we have received from investors in our hybrid funds. We believe that asset allocation is the ideal way to obtain superior returns with lower volatility. In 2012 also we expect to maintain our focus on hybrid products including Axis Triple Advantage Fund.

WF: Business confidence within the distribution business is plunging to new lows - falling markets, falling volumes, falling margins and increasing regulatory intervention being some of the current issues. How do you see the road ahead for fund distribution?

Rajiv: In the current global environment, all financial market participants (mutual funds and distributors alike) should be prepared for more, and not less, regulations on our activities. In today's volatile market, the investor is looking for opportunities that are able to provide "inflation-plus" returns with low volatility. Our analysis of retail investor data indicates that the average folio size in hybrid and fixed income funds is about six times as much as the average equity folio. The clear message from investors is that they are willing to invest more in lower volatility products. The fact that investors are looking for low volatility products and are willing to invest higher sums in these further the case for hybrid / asset allocation products. We expect distributors to focus on hybrid products so that they are more productive per transaction in a lower margin era.

WF: Should distributors bite the bullet and figure out ways to earn from their clients or can they reasonably expect to build their business models around trail income? If you were to look into a crystal ball, what revenue models do you see as sustainable in the future?

Rajiv: The maxim of the distributor community should be that if the investor makes money, so will the distributor. Long term wealth creation is about asset allocation and the power of compounding. We believe that distributors who align their clients towards these principles will be rewarded as their trail incomes would rise with client wealth. Distributors should look at selling asset allocation products as a way to deepen their share of client wallet (as discussed above).

WF: What product segments within the MF category would you ask distributors to focus on in 2012, in a bid to increase sales momentum?

Rajiv: We believe that the core focus should remain on SIPs and asset allocation products. While the equity markets have not been favourable during the year, it is to be remembered that for SIP investors volatility is their friend as it enables rupee cost averaging. We expect fixed income funds to find favour among investors as yields decline. v

WF: What are your plans at Axis Mutual Fund for 2012?

Rajiv: At Axis Mutual Fund we have now completed two successful years of operation. Our endeavour during this period has been to deliver simple and innovative products that address specific investor needs. Going forward we would continue to build on our existing line of funds, while continuing to bring new ideas to market to suit investor need and market conditions.