Insights

These are tough times for equity and even debt markets and for mutual funds. A host of global and domestic factors have sent markets into worry mode. Against this backdrop, we have made changes to our Select Fund list with caution this quarter. We have always been careful in our fund selection, preferring to base our decisions on consistency in performance, the level of risk adopted, fund strategy and the fund’s portfolio in context of the market prevailing at the time.

We prefer to avoid making snap calls based on a fund’s underperformance or sudden high outperformance. The near-term returns of our Select funds may be a put off for you. But what we can tell you is that these funds have weathered similar volatility and have emerged as consistent players. Our first suggestion to you is to therefore hold on and not make decisions based on the current performance of funds.

Equity funds
In the past month, several factors have come to a head. One, crude oil prices climbed on supply squeeze. Two, the strengthening dollar caused a swift depreciation in the rupee as well as other currencies across the globe. Both these impact inflation, deficit, corporate input costs, import costs and interest rates. Three, concerns that growth is slowing globally, persisting trade stand-offs, and the strong dollar sent foreign institutional money scurrying out of our markets.

These factors pushed the Nifty 50 and the Sensex down 9.8% since their highs in August. But as we’ve have been repeatedly saying, the index numbers belied the trend in the broader market. Mid-cap and small-cap indices had not seen a rally. Even in July, 70% of the stocks making up the BSE 500 index were lossmaking on a year-to-date basis. The Sensex and the Nifty 50 at the time were scaling highs. What does this mean?

  • The market correction is now being seen across indices. The causes for correction are larger issues that can have a macro impact and can take time to resolve. This apart, general elections are less than a year away, and markets will be volatile as they predict outcomes and the impact of the new government.
  • Fund performance has already been hit because broader markets were correcting this year. With the swift fall across the market in the past month, funds have slipped into losses on a 1-year basis.

But on the positive front, the depth of the correction means that stocks have become much cheaper. Given the concerns over the rapid rally in 2017 and its sending stock valuations up, this correction brings markets back in line. The Nifty 50 PE is down to 25 times from 28 times in just a month. Alongside, corporate earnings are looking up. The June 2018 quarter already saw broad-based earnings growth. The large companies that have declared September results have also posted good growth numbers.

As long as you are invested in quality funds and hold a properly asset-allocated portfolio, you should take the pain of the market in stride. Remain invested, continue investing through SIPs and STPs.

Debt funds
Debt market confidence was dealt a severe blow by the default of top-rated IL&FS. The confidence crisis squeezed the commercial paper market and almost brought lending to a halt. In addition, the foreign institutional outflow caused by rising US interest rates and a rapidly depreciating rupee caused markets to step up rate hike expectations. Government bond yields spiralled to 8.18% in mid-September before reversing to 7.87% now as the Reserve Bank held off rate hikes and the government stepped in to resolve the IL&FS issue.

Yields across the board – in certificate of deposits, commercial papers, corporate debt and bonds – have all moved higher. Higher yields will reflect in debt fund portfolio yields as well and in returns. This has already started to happen – for example, liquid funds’ average portfolio yields for September are at 7.42% against the 6.04% in January.

With the rate cut cycle now completely behind us, the focus will be only on accrual. Within accrual, we have and always will, step carefully where credit risk is concerned. We prefer to avoid funds where returns are very high or where portfolio yields are largely divergent from the average since these are indicators of credit risk.

As a FundsIndia investor, you would have received a mail detailing this quarter’s changes to the list and the reasoning for the same. You can also view the updated list by logging into www.fundsindia.com/select-funds.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.

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