Knee-jerk reactions to news events are likely to remain part and parcel of equity markets for the next few quarters. Systematic investments into equity products could help investors ride out any short-term volatility.
2018 saw the return of volatility in equity markets with a vengeance. Market trends switched abruptly, wrong footing market participants and investors alike. Talking points for the year included currency, crude oil, inflation, interest rates and NBFCs, among others. The result – a tough market for active investors – especially domestic equity fund managers, many of whom struggled to outperform their respective fund benchmarks. While large-cap equity indexes have held up, mid and small caps have faced a sharp correction over this period.
Debt markets too have been under pressure since 2017, with the benchmark 10-year yields pushing relentlessly higher from their demonetisation lows. In 2018, yields rose further on account of the external account – with FIIs selling, rupee falling and crude rising. Complicating the situation further for debt funds were concerns regarding NBFCs. Credit risk was brought to the forefront once again, thus highlighting that debt funds are not risk free investments and investors should heed caution while investing in relatively high risk high reward debt products.
The result has been a tough environment for mutual fund investors over the last 12 months with no obvious segment that has remained unscathed. However, the last 12 months have come on the back of some really good years and disciplined investors are not likely to be unduly concerned with a one-off tough year. A huge positive for the industry is that a big chunk of investor flows now come through regular investment vehicles (such as SIPs) making them less vulnerable to the short-term market movements.
The new fiscal brings good news to MF investors in the form of implementation of the new Securities and Exchange Board of India expense ratio guidelines. This will substantially reduce expense ratio for retail investors, especially for the large funds in the equity and hybrid fund category, and effectively improve their returns from these funds.
The last Budget increased the effective tax rates for equity MF investors for both LTCG as well as dividend incomes. Additionally, there were indications that fiscal consolidation path was getting diluted. While this affected sentiment, over the course of the year, the fiscal impact got diluted a bit due to active open market operations carried out by RBI to inject liquidity.
Going forward, we do not expect to see any significant new taxation proposals in the Budget given that this is traditionally seen as an interim Budget with elections round the corner. Hence, the focus will remain on signs of populism from the government that could further worsen the fiscal deficit trajectory. In case this plays out, it is likely to increase uncertainty and therefore volatility in the bond market. Debt funds in the short to medium term space should be well placed to help investors ride the see-saw moves in the debt markets.
On the other hand, knee-jerk reactions to news events (especially in the run-up to the elections) are likely to remain part and parcel of equity markets for the next few quarters. Systematic investments into equity products could help investors ride out any short-term volatility.
The writer is MD and CEO, Axis Asset Management Co Ltd
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