At the time of investing in mid cap and small cap mutual funds, investors should be ready for higher volatility, says Sonam H. Udasi, senior fund manager, Tata Asset Management, in an email interview with MintGenie. About Trump tariffs, he says the impact on our markets will — most likely — not continue for too long into the future.
About stock valuations, he argues that the part of IT, energy and pharmaceuticals are available cheaply. Besides, he is optimistic about the consumer platforms, financial services (not lending) and auto sector (after GST announcements).
Meanwhile, he advises young investors to learn to have patience as they start investing in financial assets. The current ideal route of investing is SWP (Systematic withdrawal plan) or STP (Systematic Transfer Plan), he advises investors. He also shares his views on the New Income Tax (I-T) Act in this interview.
Edited Excerpts
How safe are small and mid-cap mutual funds for retail investors? Allocation to these two categories has seen a jump in the past couple of months. What is your view on this?
Whether it’s mid-cap or small-cap, it’s basically investors taking a view on the potential. These being smaller-sized companies, the expectation from investors is that they will be able to grow probably faster than the large companies because of their size and therefore investors’ are betting on the potential.
The only caveat, as an investor, one should have is, what is the duration of your investment? Because when you look at smaller market cap companies, these are aspiring companies who want to become bigger, grow faster. Their ability to take a negative outcome or a shock is a little lower than some of the more established large-cap names.
So, investors should be ready for higher volatility when investing in these segments. If you have a longer-term view, say five years, then these are good segments to be invested in. Typically, because of their faster growth rates, if one is patient, return outcomes can be superior.
That being said, versus large caps, currently both mid-caps and small caps are at a slight premium versus their 10-year average, especially higher in the small-cap category. That may be a near-term headwind if you have taken a short-term view. But if investors are clear about long-term view, both these categories are pretty decent.
With two wars continuing for some time and the trade war adversely impacting global markets — what direction, in your view, will Indian markets head later this year?
Near-term impact of the (Trump) tariffs, since the outcomes are not known, market will take it as a headwind. But considering that only sub 2% of your GDP is getting impacted by these tariffs, I don’t think these will be long-term headwinds. Structurally, Indian valuations are reasonable.
Government support for growth is back. We suspect that earnings momentum will continue to improve. And if that continues to happen, Indian markets will be stronger over the next one year.
Can you tell us about Tata Value Fund – a fund you have been managing since 2016? How is your asset allocation strategy different from other funds in this category. Are there some undervalued sectors that you want to tell us about?
Tata Value Fund, which was earlier named Tata Equity PE Fund, has a pretty straightforward asset allocation strategy. It is written in our SID that the fund will invest 70 per cent of its portfolio in companies where PE multiples are lower than the Sensex on a trailing basis. This does not consider future earnings, it’s on trailing EPS 12-month basis. And 30 per cent you can allocate to growth, turnaround, etc.
Currently, some sectors that are cheaper than the index today are lenders, banking financial institutions. Also, some bit of IT is looking cheap because of recent worries. Energy sector, some of the pharma names are cheaper than the market. There are also companies within the consumer space which are cheaper than the market.
So, there is a diversified set of sectors to choose from. The valuations tend to change as things improve. The idea is to buy cheap and at some point sell at a higher valuation. To that extent, our downsides may tend to be slightly protected if there are headwinds in the market.
Aside from the sectors mentioned above, which other sectors — in your view — are likely to give above average returns in the near and medium-term future?
Consumer platforms which are growing robustly and adding more consumers to their ecosystem. Financial services (not lending) that are looking to monetise financial savings of India. Agro chems have started to look interesting. Also, auto and auto ancillaries because of the recent GST announcements.
What investing advice would you give to young investors? Should they do something different from what investors did in the past, say a decade ago?
Young investors are aspirational and sometimes impatient. I would advise patience in their strategies. Unlike the past, financial assets were not preferred earlier, but youth understand this today.
Long-term allocations to financial assets will stand in good stead considering the long-term potential of the Indian economy, our young demographics, rising per capita incomes, and the fact that India is the fastest growing economy in the world today.
From next year, there will be a revised I-T Act. Do you think simpler tax legislation is a good news for mutual fund investors? Or are there only cosmetic changes in the new legislation?
Simplicity is always good. Any simplicity in tax structure brings transparency and gives investors a better idea of where to allocate their money and what the taxation structure is. The new tax structure will give uniformity in tax outcomes. One need not choose an asset simply because of tax arbitrage. That is the aim. It gives investors more options whether to take more risk and invest in equities, or choose precious metals, realty, etc. Hopefully, tax outcomes will not be used as an arbitrage going forward.
If an investor has a lumpsum money to invest in mutual funds, should he wait for the time being, or should he stagger his investment for the next few months?
Considering that the market has consolidated in the last one year, investors can choose to use the SWP or STP route, i.e., staggered investments, but over a shorter timeframe. Market has consolidated, earnings trajectory is getting better, and once the tariff noise dies down, markets are likely to move to the music of the earnings season.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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