On May 12, 2014, Sensex closed at an all-time high of 23,551 - an intra-day rise of 2.42 per cent on expectations of a strong and stable government at the Centre. Five years later, in June 2019, the benchmark 30 share index peaked at 40,312, with a steep jump of 16,761 points. Between May 2014 and June 2019, Sensex saw a whopping 70 per cent rise. Have the effects of market volatility percolated to the mutual fund industry? How have they benefitted the investors? Market experts say there are two kinds of mutual fund investors.
Experienced investors with over last 15-20 years have had a positive experience. However, new investors with a few years in the trade would not have experienced good returns due to disparity in returns across market capitalisation.
Was the market volatility in favour of investors? According to Nilesh Shah, MD, Kotak Mahindra Asset Management Company, this is actually the time to invest in small and midcaps. “It is always difficult to figure out the direction of the market in the short term but valuations are in favour of the long term investor.”
He further adds, investors who can bear the current volatility and invest in disciplined manner will eventually reap the benefits in the long term.
For him, markets assuming indices such as Nifty 50, are discounting all the negatives. This is causing super large caps to trade at very high valuations and some are trading at their historical best. Mid caps and small caps, he says, are trading below their historical valuations. “If you look at the flows, domestic mutual funds have been net buyers month after month led by a healthy monthly SIP book of more than Rs8,000 Crore in the industry,” he explains.
Many experienced investors have been resilient and disciplined and would continue to make money in the long run. New investors have been nervous about their investments but with the help of advisors many would stay disciplined and tread on the path of long-term wealth creation.
If fundamentals are good, market sentiment and flows into the market will become better. One cannot ignore the positive aspects of low commodity prices.
However, RBI data suggests corporate credit flow has come down by 88 per cent in April to September period.
“There is a lot of confusion. On one hand, Rs5 biscuit packs are not getting sold, on the other hand, smart phones are being sold like crazy. On one hand, FMCG companies are going to give the most muted quarterly growth in 15-20 years, on the other hand, Khadi and Village Industries Commission gross sales grew by Rs15,000 crore last year,” Shah says.
Also, while auto sales have dropped across-the-board, brands like Seltos, Hector, Harrier have had a record-breaking growth.
Nimesh Shah, MD and CEO, ICICI Prudential AMC, feels market volatility is part and parcel of equity investing and says. “However, what an investor can do is to make good of such opportunities. This can be done through products that are designed to benefit out of market volatility by buying low and selling high.”
Balanced advantage or dynamic asset allocation category of funds is one such example.
“Given that the allocation to asset classes tend to be counter cyclical in nature, the downside tends to limited while the upside is reasonably captured,” he adds.
Even with a conservative approach, fund houses that are true to their label have managed to deliver good investment experience in this category.
“Hence we believe that instead of letting the market volatility affect one’s investment, an investor should opt for asset allocation products which will help navigate volatile times in an efficient manner over an entire market cycle,” he explains, adding, the mutual fund business in India is very simple, where inflows are often based on a good customer experience.
According to Ashish Shanker, Head - Investment Advisory, Motilal Oswal Private Wealth Management, markets peaking to record highs is a reference to large cap indices like Nifty50.
Looking closer, we can see that even within Nifty50 there is a huge divergence amongst the constituents. The Nifty50 has delivered 10 per cent returns since December 2017. “However, this performance is largely driven by the Top 15 stocks (66 per cent of Nifty market cap), which are up by 30 per cent over this period. The other 35 stocks, on a weighted average allocation basis, are down by 15 per cent,” Shankar says.
Most mutual funds manage risk by diversification and an average fund would have around 40-50 stocks. Hence, during a period of such divergence it becomes harder for mutual funds as an investment vehicle to outperform a narrow index like Nifty50, wherein only top few stocks have performed. “The mid and small cap indices peaked in January 2018 and have significantly underperformed the large cap indices since,” Shanker adds.
When asked how market volatility was taking its toll on investors’ returns, Shanker replies, “Unfortunately, most investors base their decisions on past performance, which leads to a significant hindsight bias in selection of funds. During the equity market rally in calendar year 2017, the Nifty Midcap 100 and Nifty Smallcap Index delivered absolute returns of 47 per cent and 57 per cent, respectively. As a result, investor allocations got skewed towards funds in these categories.
Similarly, investments increased in multi cap funds that had a comparatively larger allocation to mid and small cap stocks. Post the peak in January 2018, the indices have been highly volatile and have declined considerably. This has severely impacted funds that had a large exposure to these categories.” Hence, investor returns are significantly divergent.
Nilesh Shah says he is optimistic of the future. He is of the view that some amount of slowdown is because of right reasons such as NPA clean-up, inflation control, plugging leakages in subsidy and RERA clean-up. “These things will result in better growth. Significant steps have been taken to reverse the slowdown such as positive liquidity in the banking system, interest rate cut by 135 bps cumulatively and corporate rate tax cut,” he says and hopes more corrective measures will be taken by way of capitalisation of PSU banks, NBFCs and taking out of toxic assets from the banking system.
He feels a foundation is being laid for better growth.
“But what is more important is the government’s commitment to reforms. Combination of all these factors will result in better growth. I feel it would be more of a U-shaped recovery than a V-shaped recovery,” Shah explains, concluding, “A recovery in economic growth and in the markets will help disciplined investors to have a positive experience and mutual fund industry will continue to help investors in their path of long term wealth creation.”