ICICI Direct‘s mutual fund industry review

ICICI Direct analysis mutual fund industry in the current market scenario.

Equity market outlook
 
The Reserve Bank of India has significant flexibility in terms of rate cut on the back of 1) a sharp drop in inflation; 2) fiscal consolidation; and 3) a reduction in the current account deficit due to lower oil prices. This would be positive for rate-sensitive sectors. However, a downside risk to GDP growth expectations and a change in spending patterns in a pre-election year forces us to be selective

Leaving aside domestic policy developments in India, the evolution of an ultra-loose monetary policy in the West and the stabilisation of Western economies point towards a structural potential upside for the equity markets

A key risk for the markets may come from a spike in crude oil prices or inaction by government in taking ahead further reform. Slower economic recovery can further affect equity market returns

Domestic equity markets have been extremely volatile in the recent past making it even more difficult to predict the direction of the market in the near term

The sharp rise in the market has caught many investors unaware proving again that predicting short-term market movement is of no use

Investors who have been continuing with their SIPs or regular investment have benefited the most in the recent volatility

Our target investment plan (TIP) approach on investing is also better suited for the current environment
 
Debt market outlook
 
The overall outlook will remain positive as the sharp fall in global commodity prices along with erosion of pricing power of manufacturers due to lower domestic demand may bring WPI inflation towards 5% in the near future. Core inflation is expected to further soften. Normal monsoon will have a soothing affect on food prices and help bring down CPI inflation. All lead indicators of growth (like purchasing managers’ index, car sales, cement dispatches, industrial production, credit growth, etc) indicate a continued weakness in the economy

RBI also recognises the need to keep liquidity conditions benign to enable banks to lower deposit rates and, consequently, lending rates. OMOs would be used as a potent tool by RBI to achieve this intent. This would also anchor yields and prevent adverse sell off

Most mutual fund managers have turned bullish on duration and are overweight on longer duration corporate bonds, G-Secs & state development loans in their income funds and dynamic bond funds

A mix of short-term debt funds with focus on accrual strategy along with income or dynamic bond funds will be a better fixed income investment strategy.

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