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

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Despite the higher valuations of the benchmark index, there is no significant risk of a pullback in the short term. Rahul SinghChief Investment Officer (Equity) Tata Mutual Fund, said in an email interview Peppermint Elf. He also talked about industries that are likely to do well in the near future. While sharing investment advice for young investors, he highlighted some of the advantages of choosing mutual funds instead of investing in individual stocks.

He also told Peppermint Elf Why active mutual funds offer great investment opportunities for long-term wealth creation. He shared his views on the possible impact of the increase in LTCG in Budget 2024-25 and explained why many fund houses have recently launched new fund offers.

Edited excerpts:

Do you think the market price is too high? If so, should investors avoid investing in index schemes at current valuations?

Currently, the Nifty 50’s price-to-earnings ratio is around 21 times one-year expected price-to-earnings ratio, which is at a high level. However, the market is not uniformly valued – different segments trade at different levels. For example, large-cap stocks are relatively cheap compared to small- and mid-cap stocks. Investors should focus on areas with earnings surprises, such as pharmaceuticals, or those with attractive valuations, such as banking.

To sum up, investors should focus on market segments with higher risk-reward ratios and avoid market segments that are overvalued.

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

Currently, market valuations appear expensive, but we do not foresee significant risk of a major correction for two reasons. First of all, India’s macroeconomic indicators are still relatively strong, including GDP growth rate, fiscal deficit, interest rates, inflation, current account deficit, etc.

As such, these factors support current valuations, and any major correction would likely require significant changes in these metrics, but we don’t expect that to happen in the near term.

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In other words, at current valuation levels, we do not expect valuations to rise further. Therefore, market returns are likely to track profits or earnings growth, which we expect to be between 10-15% over the next 12 months.

As a result, we expect market returns to slow from here as valuations are unlikely to be re-evaluated. Returns will primarily reflect earnings growth rates. Additionally, as I mentioned before, risk-reward profiles vary across industries, and some hold better prospects than others.

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

The pharmaceutical and healthcare industries continue to show positive earnings momentum, with company results beating expectations. Healthcare, in particular, performed exceptionally well. Despite its strong performance over the past year, there remains significant structural visibility to earnings growth over the next two to three years.

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Additionally, the banking sector, which has underperformed over the past two years, now offers favorable risk-reward profiles. While challenges such as slower credit growth to manage constraints on deposit mobilization are likely to persist over the next three to six months, current valuations for bank stocks, both relative to the broader market and historical averages, suggest strong long-term potential. From a three to five year perspective, this makes banking an attractive industry.

Since Budget 2024 has increased the LTCG tax rate from 10% to 12.5%, do you think this will deter some investors from making profit by selling mutual fund units?

I don’t think this affects the behavior of long-term investors. I don’t think so, because equities as an asset class can give you long-term returns around nominal GDP growth, even if there’s cyclicality in it. Even if GDP growth is 6-7% and inflation is 4-5%, over the long term, stocks will earn annualized returns of 10-12%. Taxes, while increasing, remain lower than other asset classes.

Adjusting for this, stocks will always be an attractive asset class. Increases in taxes are unlikely to affect long-term investment behavior in stocks.

Would you advise retail investors to choose passive funds over active funds as most active schemes tend to fail to beat the benchmark index?

I think from a long-term perspective, active funds have clearly outperformed in the small and mid-cap category, active funds have done quite well. However, passive components do play an important role in two areas. The first one is sectoral indexes or very niche indexes, which we have also launched at Tata Mutual Fund. The second area is factor-based ETFs, particularly the momentum and alpha aspects.

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They have room to add value to the alpha they can create. So while general passive indexes like broad indexes are important, I believe niche passive indexes, such as factor or sector based indexes, will become more important over time.

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

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

However, mutual funds are more suitable for most younger investors who may lack the time or expertise. Mutual funds offer diverse investment options, including active and passive schemes, and provide comprehensive investment solutions across industries.

While mutual funds should be a core part of their portfolio, young investors can also consider diversifying through other asset classes such as equities, debt, gold and fixed deposits, depending on their risk appetite and financial goals.

What is your opinion on the latest phenomenon of fund companies launching industrial project NFO?

The recent surge in new fund offerings (NFOs), especially sectoral schemes, reflects fund houses’ attempts to offer investors more focused options targeting specific sectors. We have primarily launched passive schemes such as index funds, even in niche sectors such as capital markets and tourism.

These industries are difficult to cover with actively managed funds, so index funds are suitable for investing in these areas. However, it is worth noting that industrial plans are more suitable for investors who want to make strategic decisions on specific industries. Meanwhile, more broadly diversified funds may be more suitable for long-term, risk-averse investors.

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