The year 2017 was one like never before. After two years of flattish equity markets, it provided the much-needed boost to investor confidence.
Increasing investor awareness, a buoyant equity market, and the trigger of demonetization, helped take equity fund flows to new levels. That is not to say fixed income funds were ignored. Short-term and credit risk funds witnessed a fair bit of investor appetite as investors moved away from traditional savings avenues like real estate, gold, and bank deposits.
Long bond funds although had a rough ride as interest rates remained volatile. Retail and HNI investors led the way, with their share of overall industry assets moving up to 48.8% from 44.6% a year ago.
Performance of funds
Overall, it was a great year to be an equity investor.
With small- and mid-cap stocks leading the rally, it was not surprisingly to see small- and mid-cap funds gained handsomely. In many cases, in excess of 40%!
Large-cap funds weren’t far behind with average returns of 32%. Flexi-cap funds and equity linked savings schemes, or ELSS, delivered returns in the ballpark of 35-40%.
Balanced funds, the port of call for risk-averse or first-time equity investors, also returned a healthy over 20%, albeit lower than expectations due to volatile interest rates impacting the returns of the debt allocation.
The fixed income space had an interesting challenge.
Short-term funds and credit risk funds delivered reasonable single-digit returns.
Dynamic bond funds and long bond funds suffered due to volatile yields which inched up significantly towards the end of the year and thus returned low single-digit returns.
Mixed bag
- Gold funds had a flat year with average returns below 2%.
- Emerging market funds like China funds did rather well.
- Developed market funds, although positive couldn’t match emerging market fund performance.
The best funds of 2017
Fund flows
Retail investors re-emerged as a force to reckon with as they invested in a big way in mutual funds. So much so that domestic equity flows acted as a counterbalance to volatile FII flows in equity in 2017.
Overall equity funds received inflows of close to Rs 1.83 lakh crore, which includes diversified equity funds, equity ETFs and ELSS funds. Balanced funds received another 84,000 crore.
Money though largely continues to come into actively managed diversified equity funds and balanced funds.
ETFs received inflows predominantly from EPFO flows as well as a large issuance of the Bharat 22 ETF.
Systematic investment plans, or SIPs, were the flavour of the season, with close to Rs 60,000 crore coming in through the SIP route in 2017. The monthly SIP numbers are in the region of Rs 6,000 crore which provides a sizeable floor level for domestic flows.
The short-term and credit funds too received significant flows as bank deposit rates dropped post demonization. Dynamic bond funds and long bond funds witnessed outflows as the interest rate direction remained uncertain.
Looking ahead
Investors should certainly look to temper their return expectations from equities in the short run.
Valuations have started moving into the rich zone and corporate profit growth is yet to pick up in a broad-based manner. The external headwinds such as omnipresent geopolitical tensions and the Federal Reserve balance sheet unwind can have an adverse short-term impact on our markets.
Investors should continue to focus on their suggested asset allocation as per their risk-return profiles and not get carried away by past returns of certain asset classes or fund categories.
Gold funds and international equity funds which have been largely ignored by investors due to lower returns should find an allocation in your portfolio for risk diversification.
SIPs are a brilliant way of investing and should be a part of every individual’s investment plan. Not only do they help reduce market timing risk, they also help instill financial discipline in investors by making sure you save enough every month to make good your SIP investments.
As more investors come under the fold and greater assets start moving out from physical assets we will witness an increasing trend of investors moving to mutual funds. We expect the inflows to remain robust for years to come.
This post initially appeared in Moneycontrol.com
