Tridib Pathak joined fund house Cholamandalam Asset Management Company as the Chief Investment Officer last year.

He shares his views on the stock market, where it is heading and whether or not investors should consider investing in shares.

Reproduced here is an extract from the interview that has appeared in Mutual Fund Insight, a monthly magazine on mutual funds. 

• Buying shares for the first time?

On the stock market falling*

The market could fall 10% from here but this 10% is 700 points. Volatility is part of the game, and you cannot plan for it.

An investor should ask if he is going to make money for the next three years, even at these levels. The answer is a "yes". When you reach a level where you feel that you will not make much money is when you start worrying.

We are a long way from there right now.

If you look at the Indian market for the last 15 years, an average bull market has lasted 12 to 15 months. The current bull market started two and a half years ago. And, this creates a positive sentiment for equities as a class of assets.

We have seen money coming from outside India so far and not from within India. But, there is a lot of money sitting in India, which will move from other asset classes into equities as we move forward.

Considering all these factors, we are definitely encouraging investors to look at this market as an opportunity.

• How to select stocks that make money

On stock market returns

Considering the 15% growth for three years in the Sensex stocks, and if you add up the other opportunities and the fact that you can still beat the market through active fund management, the prospects are quite bright from an investor's standpoint.

Unfortunately, many people have wrong expectations from equity investments. They always want to double money in one or two years. That probably is coming to an end, in a way.

Even if you earn 12% to 15% from equities, it is more than what the alternative investments are offering.

• Investing is an art, not a science

On liquidity

In recent times, there is a belief that the market is going up because there is liquidity. But if you look at the fundamentals, the situation is exactly the reverse. The money is coming because the Indian markets are attractive.

Let's look at the fundamentals.

There is little doubt of corporate profit growth. All the elements of strong growth are in place. There is strong economic growth that seems sustainable.

The visibility of economic as well as corporate growth going forward is also longer. We should be seeing at least 15% corporate profit growth a year for the next three to five years for the broader market.

India stands apart as a reservoir of growth while most global companies are growing slowly.

• Should you buy or sell stocks now?

On why stocks are still attractive

The one-year Forward Price Earnings ratio for the Sensex stocks is about 14.3 times.

Remember, the earnings estimates are conservative going by the first quarter results, which have surprised everybody on the positive side. Most people expected the first quarter profit growth between 10% to 20%, but the profit growth has been almost 30%.

If the much needed boost from the agriculture sector happens, we will be positively surprised.

We started this year with a 6.5% GDP growth forecast, considering that agriculture growth is not going to be much. If agriculture grows, then we will see higher economic growth, which will lead to higher corporate profit growth too.

The P/E based on 2006-07 earnings is around 13 times, which is lower than the past 15-year average one year Forward P/E of around 15 times. The 15-year- forward P/E range has been between 11 and 28, so we are closer to the bottom of the range than the top.

Based on the stronger growth and better visibility, I would think there is a case of a P/E re-rating to 17-18 times as we go forward.

So, this is the heart of the argument of attractiveness creating liquidity.

To understand these ratios in details, read How to spot a good stock.

On mid-caps 

If you go beyond the Sensex companies, this growth is creating opportunities for lots of companies. That is why we have had a resounding rally in mid-caps.

When we launched our mid-cap fund in July 2004, our argument was that India will keep growing for a long time and the economy will throw up opportunities for many companies to grow faster and become larger.

This is the process of evolution.

When you invest in mid-caps for the long-term, you are participating in companies that will become blockbusters of tomorrow.

Six years back there were just 25 to 30 large-cap companies in India whereas today as have 75 large-caps. This number will double five years later.

Obviously, the medium-sized companies are going to migrate to being large-caps. Though there are a lot of mid-caps which have become overvalued in the frenzy of the last two years, there will be good stocks here.  

To understand the mid-cap frenzy, read Why mid-caps are hot!

* This interview was given early September just before the Sensex touched 8000 points.