Rahul Singh, chief investment officer, equities, Tata Asset Management, says certain pockets of small caps are looking overheated and arbitrage funds are a tax efficient way to earn fixed income yields with extremely low risk.
Given the stage of the economic cycle and the mixed track record in specific sectors, a healthy mix of active funds is required to generate alpha. Rahul Singh, chief investment officer, equities, Tata Asset Management, in an interview to Saikat Neogi, says certain pockets of small caps are looking overheated and arbitrage funds are a tax efficient way to earn fixed income yields with extremely low risk. Excerpts:
The equity rally is making investors wonder whether to hold on to their investment or book profit. What is your advise?
Headline valuations are at 10-15% premium to 10-year historical range but are supported by the lower bond yields in comparison to what we have witnessed in the last decade. In addition, India’s premium to other emerging markets, while approaching the higher end now, is supported by the pro-growth and pro-reform stance of the government and fiscal/monetary policy. All things considered however, the market appears to be around its fair valuation and hence the returns from equities will now track medium term earnings performance, i.e., beyond the current fiscal year. There is a cushion from the bottom-up corporate earnings which have been driven by multiple sectors this time. However, inflation risk and how that plays out into bond yields remain the biggest risk to equity valuations.
If an investor wants to build a long-term portfolio in equity mutual funds, is a mix of passive and active funds a good idea?
We believe passive funds serve a purpose in certain categories dominated by large caps. But given the stage of the economic cycle and the mixed track record in specific sectors or themes, a healthy mix of active funds is required to generate alpha. In addition, given the stage of the economic cycle which we are in where Indian economy is steadily progressing towards economic expansion, broader markets have done well and could continue to do so which bodes well for the active funds.
Why are arbitrage funds gaining such high traction?
Arbitrage funds have proved to be a tax efficient way to earn fixed income yields with extremely low risk. As a result, the arbitrage category is attracting investors from categories like risk-averse individual investors, institutional and corporate treasuries. It has also been used as temporary allocation of funds as the valuations continued to go up. The yields from arbitrage funds will move in sync with the overall rate environment.
Should investors follow the core and satellite approach in equities in this market?
Given the interplay of strong micro and uncertain macro, investors should have a good mix of dynamic asset allocation or balanced advantage funds and large & midcap/flexicap funds as core and can reduce the allocation to pure small cap category. We are indifferent between large and midcaps but certain pockets of small caps are looking overheated now.
As Systematic Investment Plan (SIP) additions have expanded rapidly, does it indicate democratisation of the equity culture?
It is a combination of digitalisation and democratisation. Traditional channels have been big proponents of SIP and digital channels are now lending a lot more support in getting SIP proliferation. This augurs well as more investors are participating and is helping the market develop deeper roots.