Pharma, healthcare & banking sectors to do well for investors, says Rahul Singh of Tata Mutual Fund

Despite the high valuations of benchmark indices, there is no significant risk of a major correction soon, Rahul Singh, Chief Investment Officer (equities) of Tata Mutual Fund, says in an emailed interview with MintGenie. He also speaks about the sectors that are likely to do well in the near future. While sharing an investing advice for the young investors, he highlights a few advantages of opting for mutual funds instead of investing in individual stocks.

He also tells MintGenie why active mutual funds offer a good investment opportunity for long-term wealth generation. He shares his view on the likely impact of the increase in LTCG in Budget 2024-25 and explains why a number of fund houses have recently launched new fund offers.

Edited excerpts:

Do you think the market is overpriced? If yes, should investors refrain from investing in index schemes at the current valuation?

Currently, the Nifty 50 is trading at a P/E of around 21 times one-year forward earnings, which is on the higher side. However, the market is not uniform in its valuations—different segments are trading at different levels. For instance, large-cap stocks are relatively less expensive compared to mid and small-caps. Investors should focus on areas that either have positive earnings surprises, such as the pharma sector, or those that are attractively valued, like the banking sector.

In summary, this is a market where investors should concentrate on segments with a favourable risk-reward ratio and steer clear of those where overvaluation has reached extreme levels.

What is your near-term outlook for financial markets? Will the markets correct any time soon? By what percentage can we expect the market to correct in the near future?

Currently, market valuations appear expensive, but we don't foresee a significant risk of a major correction for two reasons. First, the Indian macroeconomic indicators remain relatively strong, including the GDP growth rate, fiscal deficit, interest rates, inflation, and current account deficit.

Therefore, these factors support the current valuations, and any major correction would likely require a significant change in these metrics, which we don't anticipate happening in the near term.ion 

That said, at these valuation levels, we don't expect further upward movement in valuations. As a result, market returns are likely to track the profit or earnings growth rate, which we estimate to be in the 10-15% range over the next 12 months.

Consequently, we expect market returns to moderate from here, as additional valuation re-rating is unlikely. The returns will primarily reflect the earnings growth rate. Additionally, the risk-reward profile varies across sectors, with some offering better prospects than others, as I mentioned earlier.

Which are the sectors that are likely to do well in the near future?

Pharma and healthcare are sectors that continue to show positive earnings momentum, with companies performing better than expected. The healthcare segment, in particular, has been performing exceptionally well. Despite the strong performance of the past year, there remains significant structural visibility for earnings growth to continue over the next two to three years.

Additionally, the banking sector, which has underperformed in the last two years, now offers a favourable risk-reward profile. While challenges such as slower credit growth to manage the constraints on deposit mobilization may persist for the next three to six months, the current valuations of banking stocks, both in relation to the broader market and their historical averages, suggest strong long-term potential. This makes banking an attractive sector from a three to five-year perspective.

As the Budget 2024 raised the LTCG tax rate from 10 to 12.5 per cent, do you think this will dissuade some investors from booking profits by selling their mutual fund units?

I don't see this impacting long-term investor behaviour. I don't think so because equity as an asset class can give you long-term returns around the nominal GDP growth rate, even if it will have cyclicality in between. Even if the GDP growth rate is 6-7 per cent and inflation is 4-5 per cent, you are looking at 10-12 per cent annualized returns over a very long term from equities. Taxation, although increased, is still lower than other asset classes.

Adjusting for that, equity will always remain an attractive asset class. This rise in tax is unlikely to influence long-term investment behaviour towards equities.

Would you recommend retail investors opt for passive funds instead of active funds, as most active schemes often fail to beat the benchmark index?

I think in active schemes, clearly from a long-term perspective, there's been decent outperformance in mid and small-cap categories, and active funds have done reasonably better. However, passives do have an important role to play in two areas. The first is in sectoral indices or very niche indices, which we have also been launching at Tata Mutual Fund. The second area is factor-based ETFs, especially on the momentum and alpha side.

These have room to add value regarding the alpha they can create. So, while plain vanilla passives like broad indices are important, I believe niche passives, such as factor-based or sectoral indices, will become more significant over time.

Would you suggest young investors invest in mutual funds only, or should this be just one of the asset classes (besides stocks, debt, andgold)?

For young investors, it's important to consider their level of market knowledge and the time they can devote to managing investments. Direct equity investment may be an option if they have a basic understanding of the market and can commit time.

However, mutual funds are more suitable for most young investors who may lack time or expertise. Mutual funds offer diverse investment options, including active and passive schemes, and provide a well-rounded investment solution across various sectors.

While mutual funds should be a core part of their portfolio, young investors can also consider diversifying with other asset classes like stocks, debt, gold, and fixed deposits based on their risk appetite and financial goals.

What is your view on the latest phenomenon of launching NFOs of sectoral schemes by fund houses?

The recent surge in new fund offers (NFOs), particularly sectoral schemes, reflects fund houses' attempts to provide investors with more focused options in specific sectors. We have primarily launched passive schemes, such as index funds, even in niche sectors like capital markets and tourism.

These sectors are challenging to cover in actively managed funds, making index funds suitable for offering exposure to these areas. However, it’s important to note that sectoral schemes are more tailored for investors who want to make strategic calls on specific sectors. At the same time, broader diversified funds may be better suited for long-term, risk-averse investors.