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What to expect from your mutual funds in 2015? - Outside View by PersonalFN

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What to expect from your mutual funds in 2015?
Dec 31, 2014

The time has come to say bye-bye 2014 and give a warm welcome to the Year 2015. Knowingly or unknowingly we all try to make a summary of what we did in the passing year. You would expect yourself to stay in better health and become wealthier with each passing year. If you sit down and make assessment of performance of your equity oriented investments, you would realise that the year 2014 has been a good one for you if you stayed invested in quality stocks and equity oriented funds.

Performance of equity indices
  Returns (absolute %)
Indices Year 2010 Year 2011 Year 2012 Year 2013 Year 2014 *
S&P BSE Sensex 17.4 -24.8 25.2 8.1 29.6
S&P BSE 200 16.2 -27.3 30.8 3.4 34.4
S&P BSE Mid-Cap 16.1 -34.8 38.6 -6.8 51.5
Calendar Year returns considered
* returns upto December 29, 2014
(Source: ACE MF, PersonalFN Research)

Year 2014, proved to be the best year for Indian equity markets when performance of last 5 calendar years is considered. Markets didn't only witnessed strong rallies but also reached to new highs. Clear mandate to NDA Government was the biggest catalyst to ferocious rallies. There have been huge expectations from the Modi-led NDA Government. The new Government is expected to put Indian economy on fast track. The pre-election rally that began in September 2013 got stronger by January 2014 and markets just kept rising thereafter. Betting big on India, foreign institutional investors (FIIs) pumped in close to Rs 97,000 crore in India during the year gone by. Mutual Funds invested nearly Rs 23,200 crore during the year on net basis. However, it is noteworthy that until the NDA Government was formed in May, mutual funds were net sellers as they offloaded stocks roughly worth Rs 113 crore. This suggests that, many investors may have expected a hung parliament situation and therefore, might have exited in pre-election rallies. Having said this, retail interest revived after the stable government was formed with majority. Those who speculated about market movement may have missed the greater part of the on-going rally. If you expected the market to fall post-election and waited for right buying opportunities at lower levels, you may not have got any such opportunity as markets just kept rising without any significant correction.

How Mutual Funds performed?

Mutual Funds have not only generated superior returns as compared to those generated by some prominent indices, but have outperformed them with a good margin. Equity diversified funds have recorded stellar performance in 2014; irrespective of their market cap focus or investment style they outperformed broader markets.

Mutual Funds- Shinning again
Mutual Funds- Shinning again
Category average returns have been considered for the each calendar year
For the year 2014, returns upto December 29, 2014 have been considered
For the purpose of calculating average returns, a sample of 48 largecap funds,
34 midcap funds 61 multi-flexi and opportunities funds and 19 value funds has been considered
(Source: ACE MF, PersonalFN Research)

Midcap oriented funds are the clear winners as they generated 73.4% returns on an average in 2014. This was followed by the 52.3% returns generated by the category of value funds. While largecap funds yielded close to 41.0% returns, category of multicap-flexi cap and opportunity funds generated 48.1% average returns during the passing year.

What supports the on-going rally?

Nothing has changed significantly on the ground except for the fact that inflation has cooled off considerably, albeit due to higher base effect. Industrial growth remains anemic and GDP growth still hovers at around 5% mark. However, it is expected that, NDA Government would take all step necessary for staving off economic lull and rebuilt business confidence that was lost due to so called poor performance of the previous Government pertaining to policy decision making. The new Government has introduced a whole host of changes in the bureaucratic system and has cleared hundreds of infrastructure projects stuck for approval; however, none has translated into improved economic indicators. So speaking about the current market situation, what we have been witnessing it just a "hope rally". It started on a lower valuation base and now appears to be tiring as nothing has significantly improved on the ground and valuations have become expensive too.

Would rally continue in 2015?

The finance minister has hinted at second generation reforms which are expected to be introduced in the first full budget of the NDA Government, scheduled to be presented in February 2015. If much awaited reforms fall short of expectations, there is a possibility that markets might correct considerably. Besides this, Inflation, interest rate movement, industrial growth and the performance of India Inc. would affect the market movement in 2015. International factors such as monetary policy stance of developed economies, commodity prices and geo-political conditions may also impact the market movement in India.

What should you do with your diversified equity funds?

PersonalFN has always believed that, investors shouldn't speculate on any particular event and stay invested in mutual funds for long term. PersonalFN is of the view that you should invest in diversified equity funds that have a proven track record of consistent performance. Sector specific funds may generate good returns for you in one year but there is always a possibility that they might incur heavy losses in another. On the contrary, diversified equity funds not only give you a chance to generate superior returns but they also expose you to lower risk as they invest across sectors.

You should consider your personal financial goals, your risk appetite and current financial circumstances as important factors before deciding upon how much to invest in diversified equity funds. Your personalised asset allocation created keeping in mind your financial goals, may help you invest wisely.

Under current market scenario, you would be better off if you opt for the systematic Investment Plans (SIPs) offered by mutual funds. Given that, market valuations are rich at present and future of the on-going rally is contingent upon significant improvement in the fundamentals, there is a possibility that, markets may experience a bumpy ride ahead. By opting for SIP route, you may ensure that, you get benefits of rupee-cost averaging, as you buy more units of mutual funds when the Net Asset Value (NAV) falls due to fall in the markets. So let's welcome 2015 but with caution.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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