Pharma, healthcare and banking sectors will do well for investors, says Tata Mutual Fund’s Rahul Singh

Despite the high valuations of the benchmark indices, there is no significant risk of a major correction soon. Rahul SinghInvestment Director (shares) of tata mutual fund, says in an email interview with MintGenie. It also talks about the sectors that are likely to do well in the near future. While sharing an investment tip for young investors, he highlights some advantages of opting for mutual funds instead of investing in individual stocks.

he also says MintGenie Why active mutual funds offer a good investment opportunity for long-term wealth generation. Share your opinion on the likely impact of the increase in LTCG in Budget 2024-25 and explains why several fund houses have recently launched new fund offerings.

Edited excerpts:

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

Currently, the ingenious 50 It trades 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 trade at different levels. For example, large cap stocks are relatively less expensive compared to mid and small cap stocks. Investors should focus on areas with positive earnings surprises, such as pharmaceutical sectoror those that have an attractive valuation, such as banking sector.

In short, this is a market where investors should focus on segments with a favorable risk-reward ratio and stay away from those where overvaluation has reached extreme levels.

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

Market valuations currently look expensive, but we do not foresee significant risk of a major correction for two reasons. First, India’s macroeconomic indicators remain relatively strong, including GDP growth rate, fiscal deficit, interest rates, inflationand current account deficit.

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

That said, at these valuation levels, we do not expect further upward movements in valuations. As a result, market returns are likely to follow the earnings or earnings growth rate, which we estimate will be in the range of 10-15% over the next 12 months.

Consequently, we expect market returns to moderate from now on as further valuation reratings are unlikely. 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 above.

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

Pharmaceuticals and healthcare are sectors that continue to show positive earnings momentum, with companies performing better than expected. The healthcare segment, in particular, has performed exceptionally well. Despite last year’s strong performance, 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 past two years, now offers a favorable risk-reward profile. While challenges such as slower credit growth to manage constraints on deposit mobilization may persist over the next three to six months, current valuations of banking stocks, both relative 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.

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

I don’t see this affecting long-term investor behavior. I don’t think so, because equities as an asset class can offer long-term returns close to the nominal GDP growth rate, even if it is cyclical in between. Even if he GDP growth rate is 6 to 7 percent and inflation is 4 to 5 percent, we are seeing very long-term annualized returns of 10 to 12 percent from stocks. Taxes, although increased, are still lower than other asset classes.

With this in mind, stocks will always remain an attractive asset class. This tax increase is unlikely to influence long-term investment behavior in stocks.

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

I think in active schemes, clearly from a long-term perspective, there has been decent outperformance in the midcap and smallcap categories, and active funds have done reasonably better. However, passive They 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 in Tata Mutual Fund. The second area is factor-based ETFs, especially on the momentum and alpha side.

These have room to add value with respect to the alpha they can create. So while simple passives, like broad indices, are important, I think niche passives, like sector or factor-based indices, will become more significant over time.

Would you suggest young investors to invest only in mutual funds, or should it be just one of the asset classes (besides equity, debt and gold)?

For young investors, it is important to consider their level of market knowledge and the time they can dedicate to investment management. Investing directly in stocks can be an option if you have a basic understanding of the market and can put in the time.

However, mutual funds are best suited for most young investors who may lack time or experience. Mutual funds offer various investment options including active and passive schemes and provide a comprehensive investment solution across various sectors.

While mutual funds should be a core part of your portfolio, young investors can also consider diversifying into other asset classes such as stocks, debt, goldand fixed deposits based on your risk appetite and financial objectives.

What is your take on the latest phenomenon of NFO launch of sectoral schemes by fund houses?

The recent increase in new fund offers (NFO), particularly sectoral schemes, reflect attempts by fund houses to provide investors with more focused options on specific sectors. We have mainly launched passive schemes, such as index fundseven in specialized sectors such as capital markets and tourism.

It is difficult to cover these sectors with actively managed funds, making index funds suitable for offering exposure to these areas. However, it is important to note that sector schemes are more suited to investors who wish to make strategic decisions in specific sectors. At the same time, broader diversified funds may be more suitable for long-term, risk-averse investors.