Jan 14, 2018 05:56 PM IST | Source:

Gold failed to glitter while small & midcap funds had a party in 2017

Gold Funds had a flat year, with average returns below 2 percent. Global funds were a mixed bag, emerging market funds like China funds did rather well

Kaustubh Belapurkar

2017 was a year like never before. After two years of flattish equity markets, the year 2017 provided the much-needed boost to investor confidence.

Demonetisation was a huge trigger, coupled with increasing investor awareness and buoyant equity markets 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.

Fund performance

The Small & Midcap stocks led the rally and not surprisingly smallcap and midcap funds gained handsomely. In many cases in excess of 40%!

Largecap funds weren’t far behind with average returns of 32 percent. Flexi cap and ELSS funds delivered returns in the ballpark of 35-40 percent.

Overall, it was a great year to be an equity investor. Balanced funds, the port of call for risk-averse or first-time equity investors, also returned a healthy over 20 percent, albeit lower than expectations due to volatile interest rates impacting the returns of the debt allocation.

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The fixed income space though had an interesting challenge, while short-term funds and credit risk fund 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.

Gold Funds had a flat year, with average returns below 2 percent. Global funds were a mixed bag, emerging market funds like China funds did rather well, but developed market funds although positive couldn’t match emerging market fund performance.

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 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 (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 INR 6000 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.

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Looking Ahead:

2017 was exceptional both in terms of equity returns as well as flows. 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 Fed 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 instil 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 into Mutual funds to remain robust for years to come.

Disclaimer: The author is Director of Fund Research at Morningstar Investment Adviser. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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