How Will 2019 Be For Mutual Funds?
Dec 26, 2018

Author: PersonalFN Content & Research Team

Usually, during this time of the year investors assess how the year’s events panned out vis-à-vis what they had planned at the beginning.

They celebrate their achievements and go back to their drawing board to redevise strategies and overcome their shortcomings.

What are you doing these days?

If you are a naïve mutual fund investor, you’re probably carefully reading the newspapers to understand what went wrong with your investments in 2018 and how can you improve the performance in the coming year.

If you are a seasoned investor, you might be busy consoling yourself that 2018 was a one-off bad year and recall the good highlights of 2017. Optimistic investors are reading about potential investment opportunities that might come their way in 2019.

In this article, we will quickly recap 2018 from the mutual fund industry’s perspective and discuss likely scenarios for 2019.

Highlights of 2018…

The government imposed a long-term capital gain tax on equity investments

At the beginning of 2018, the market was optimistic about the government slashing personal tax rates in Budget 2018. But on the contrary, it brought long-term capital gains arising from equity under the ambit of taxation.

Initially, markets took this development negatively and witnessed a sharp fall until the end of March 2018. Equity-oriented mutual funds suffered a severe blow, and most of them generated negative returns in the first quarter of 2018. But the market accepted the reality and moved forward from April onwards.

SEBI implementation categorisation and rationalisation norms affected the industry

SEBI introduced reclassification norms in October 2017. Their aim was to bring uniformity to the characteristics of mutual fund schemes that belonged to the same category and make the selection of schemes easy for investors. To comply with these norms, equity-oriented mutual funds churned their portfolios significantly. This has been one of the many reasons for small caps falling unprecedentedly in 2018.

But in the long run, SEBI’s reclassification norms are expected to help investors choose mutual fund schemes more appropriately.

[Read: Has SEBI’s Mutual Fund Categorization Made Selecting Schemes Easy? Know Here…]

SEBI took some aggressive and far-reaching pro-investor decisions

Be it regularising the cost structure or banning the upfront commissions; SEBI took a number of decisions that have made mutual fund investing more investor-friendly and affordable.

The capital market regulator also made it mandatory for mutual funds to benchmark the performance of their schemes against suitable Total Return Indices (TRI) and rationalized the expense ratio too in the interest of investors.

Tough year for fund managers

The S&P BSE Sensex so far has generated a meagre 4.2% absolute return. Speaking of the mid and small-cap index, it hit a rough patch and so far recorded double-digit losses. This divergence in returns generated by indices and individual stocks has been unusual for mutual funds, and as a result in 2018, many fund managers have struggled to match the returns generated by TRI indices.

Under the rapidly changing global and domestic investment climate, not only fund managers of equity schemes struggled to outperform with noticeable margins, but those managing the debt funds also had a tough time. The IL&FS fiasco exposed many flaws in the investment processes of debt funds and rating processes of independent credit rating agencies.

Index funds outshone…

  Absolute (%) CAGR (%)
Category YTD 1 Month 3 Months 6 Months 1 Year 2 Years 3 Years 5 Years
Contra Funds -5.8 1.2 -2.1 -3.9 -5.4 16.9 12.9 17.1
Dividend Yield Funds -8.7 1.2 -4.1 -4.4 -8.4 13.0 10.7 13.8
Focused Funds -6.6 1.5 -1.9 -3.8 -6.4 14.9 11.5 16.8
Index Funds - Nifty 1.6 1.2 -2.9 -1.3 1.9 16.4 11.5 11.9
Index Funds - Nifty Next 50 -10.2 1.5 -0.5 -3.6 -9.7 16.0 12.7 17.1
Index Funds - Sensex 4.9 1.4 -2.1 -0.2 5.3 17.4 11.9 11.7
Index Funds - Other -5.2 0.8 -3.4 -3.4 -4.3 13.7 8.9 12.2
Large & Mid Cap Funds -7.9 1.7 -1.2 -2.7 -7.5 14.7 11.8 17.6
Large Cap Funds -3.6 1.2 -1.6 -2.2 -3.5 14.5 10.7 14.2
Mid Cap Funds -12.4 2.1 -0.9 -4.2 -11.6 13.3 10.3 19.8
Multi Cap Funds -6.3 1.3 -1.3 -2.7 -5.9 14.5 10.6 16.3
Small cap Funds -17.5 1.0 -2.3 -7.9 -17.0 12.1 9.9 21.4
Value Funds -10.3 0.9 -2.6 -5.0 -9.7 13.4 11.0 18.2
NIFTY 50 - TRI 2.7 1.3 -2.6 -0.8 3.1 17.1 12.2 12.6
Nifty Midcap 150 - TRI -14.1 1.7 -1.7 -4.7 -12.9 16.8 13.0 20.8
Nifty Smallcap 250 - TRI -27.4 1.4 -5.5 -12.2 -26.6 8.3 5.6 17.7
S&P BSE SENSEX - TRI 5.4 1.4 -2.1 0.0 5.8 18.1 12.6 12.6
S&P BSE Small-Cap - TRI -24.2 0.8 -5.6 -12.0 -23.2 11.6 8.1 18.6
Data as on December 24, 2018
(Source: ACE MF)

[Read: How IL&FS Rating Downgrade Will Impact Your Mutual Funds…]   

However, investors weren’t jittered

Mutual fund houses have been successful in keeping investors glued to their Systematic Investment Plans (SIPs) despite wishy-washy market conditions. As compared to Rs 53,260 crore in the first 11 months of 2017, SIP investments of Indian investors grew to Rs 80,645 crore in the first 11 months of 2018, a rise of 51%. According to the Association of Mutual Funds in India (AMFI), 2.52 crore investors invest in capital markets through SIPs.

What to expect in 2019?

Will Passively Managed Exchange Traded Funds (ETFs) gather momentum?

If the macroeconomic environment remains challenging and if we witness political uncertainty, pure large-cap oriented schemes might find it difficult to outperform large-cap ETFs in 2019. Since large-cap funds are expected to invest at least 80% of their assets in top 100 stocks, there’s little scope to find mispriced opportunities for actively managed funds.

Having said that, given that India is developing economy the Indian equity market will continue to offer promising investment opportunities for alpha generations to the fund managers of active funds.

Mid and small cap funds might offer long-term wealth creation opportunities

Despite the steep fall in their market capitalisation, to the tune of 50%-60% in some cases, mid and small cap stocks appear overpriced as compared to their large-cap counterparts even on forward-looking price-to-earnings multiples.

If Indian markets fall further around elections, or if any global event drags them, small and, midcap companies might start looking attractive. Fund managers of process-driven fund houses might take advantage of the market volatility to buy some quality stocks for the long term.

Thus, avoiding mid and small-cap funds entirely in 2019may not be very prudent.

If markets struggle to run up, growing SIP accounts might become a challenge

Many new investors that have participated in the markets through mutual fund SIPs over the last few years haven’t seen any extended bearish phase of the market. If the markets fail to generate attractive returns even in 2019, some investors might consider discontinuing their SIPs. That’s the real challenge mutual fund houses may have to deal with in 2019.

Discontinuation of upfront commissions might hurt the industry growth  

Discontinuation of upfront commissions may have a bearing on the AUM (Assets Under Management_  growth of the Indian mutual fund industry. Distributors might refrain from pushing mutual fund products due to the lack of incentives.

Lump-sum investments might dry up substantially and the new SIP volumes may not be sufficient to compensate the shortfall. Moreover, if Foreign Institutional Investors (FIIs) decide to pull out money even in 2019, the domestic mutual fund industry might also see some outflows due to falling markets.

Subsequently, mutual fund houses might start rolling out more index and strategy-based ETFs which is evident from the recent launches. On the other hand, the distributor fraternity might try to sell you more insurance-cum-investment products to earn more upfront commissions

Debt funds might come around…

As explained earlier in this article, debt funds faced tough times in 2018. After, taking charge at RBI, Mr Shaktikanta Das has reaffirmed his commitment to protecting RBI’s credibility and autonomy under his tenure.

His hands-on experience in the north block might play a crucial role in breaking the deadlock between RBI and government. If the credit environment in the country improves in 2019, and inflation remains under control, as it’s been the case so far, debt funds might generate better returns in 2019. Falling crude oil prices and the stabilising US Dollar is positives and may nullify the adverse impact of the rising fiscal deficit to an extent.

What should you do?

  • Before investing in a mutual fund scheme, recognise your risk profile, investment objectives, financial goals, and the investment time horizon among other factors

  • Draw a personalised asset allocation plan based on the factors above

  • Invest via SIPs (Systematic Investment Plans) to mitigate the risk involved

  • Prefer direct plans

  • Invest in mutual funds coming from process-driven fund house that have a dependable track-record

Don’t pick mutual funds based on past returns; they may not sustain going forward. Look at the qualitative factors instead. Also, do note that selecting a winning mutual fund based on star ratings has become less relevant after SEBI’s categorisation norms.

[Read: Why Qualitative Aspects Are So Important To Pick Mutual Funds]

If you are concerned about your investment portfolio, instead of speculating on election outcomes and Donald Trump’s trade policies focus on your long-term goals. And ensure that you are investing in mutual funds after thorough research.

Editor’s note:

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PersonalFN has a dependable track record and we guide investors with unbiased views. PersonalFN does not take shortcuts when it comes to mutual fund research – a comprehensive rating methodology is followed. Thousands of data points are analysed to shortlist mutual fund schemes on a host of quantitative and qualitative parameters to our recommendations: buy, hold, and sell.

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