Mutual Fund: When the going gets tough


2018 saw 23 diversified equity funds beat Sensex with a decent margin, but a good part of the universe turned laggard.

How often is a roller coaster ride used to describe the state of the stock market? No prizes for guessing, as the answer is quite often. The just concluded fiscal year (FY18) was like one of those amusement park rides, giving thrills and chills with every swing. From April 1st 2017 to January 29, 2018, while the benchmark Sensex was up at 22 per cent, the return halved to 11.3 per cent by the time the fiscal came to a close. Market sentiment was dampened by rising inflation, muted macro data, weak corporate earnings and an overhang of governance and fraud issues compounded the woes of an already beleaguered banking sector. Among global macros, a more hawkish Fed, the US china trade war and rising crude oil prices to be the big spoilers.

It was a difficult year for fund managers as equity diversified funds, as a category, delivered an average 12.07 per cent, just in line with market return. Compared with FY 17, the category return was abysmal, lagging behind by 1459 basis points. As many as 54 funds delivered return in line with the Senex, generating 10-200 basis points more than the benchmark.

However, it is interesting to note that despite the volatile conditions, 23 schemes outperformed by a meaningful margin of more than 690 bps on average. The top performing fund delivered a whopping 2313 bps return, exceeding the benchmark.

The top performing funds were led by SBI Small and Midcap Fund (34.43 percent), HDFC Small Cap Fund(31.5 percent), L&T Emerging Business Fund(27.32 per cent), IDFC Focused Equity (27.21 per cent) and Reliance Small Cap Fund (25.28 per cent).

The way ahead

Going forward, Fund houses remain positive on housing, building materials, automobiles, chemicals, consumption and broadband. They believe these sectors offer multi year growth opportunities. However, corporate banks will continue to face stress owing to recent changes that require up fronting of stress recognition. Once the large cases in IBC/NCLT get resolved, there can be some relief, and some write backs of provisioning. However, the FY 19 would not be an easy year. While FY 18 was an excellent year for small caps, this year will be more volatile and markets are likely to consolidate. Overall, factors like global volatility, the evolving political scenario, imposition of LTCG, rising oil prices and commodity prices would continue to have its impact on sentiment fund. In FY 18, the BSE midcap index gained 13.23 percent, while the small cap index was up 20.5 per cent. The BSE benchmark Sensex was up 11.3 percent during the same period.

The headline PE multiple levels have remained elevated over past few years without any materials earnings growth. However, earnings are set to grow in double digits in FY 19 due to a low base, setting the stage for a stronger growth in FY20

Fund houses look for companies and sectors that are ignored and out of fashion for some reason but where things are improving. This not only gives you the time to accumulate stocks at reasonable valuations, but also gives you the opportunity to gain from earnings growth and participate in P/E re rating of the stock. Overall, companies where businesses are good, growing, run by capable management and have good return ratios and cash flows are preferred.

In FY 18, equity funds saw net inflow of Rs. 1.7 lakh crore, while it is too early to reach any conclusion, fresh inflows in equity funds could slow down in FY 19. In April, inflows in equity funds were down at a 12 month low of Rs. 25,221 crore, falling 35 per cent on a month on month basis.


Keeping moderate expectations and having equity exposure that is suitable to one’s temperament would be the key for investors going forward. There would be enough opportunities for stock pickers. However, it would be interesting to see if as many equity funds are able to generate meaningful alpha in FY 19 as fund managers brace themselves for even more swings than the roller coaster ride they saw in the year gone by. In the current fiscal, the equity diversified category has thus far generated a return of 4.29 per cent as of May 15, underperforming the benchmark Sensex which has generated a return of 7.3 per cent over the same period. Looks like even the best performing fund managers have their task cut out.

To help you to overcome the move, we shall help you decipher the best, meeting your objectives and goals.

Hope you enjoyed reading this edition.


The views of the authors/publishers should not be construed as advice. Investors must make their own investment decisions based on their specific investment objectives and financial positions and using qualified advisors as may be necessary. Opinions expressed in various articles are not necessarily those of Wealthmax Enterprises Management Private Limited(WEMPL) or any of its directors, officers, employees and personnel. Consequently, WEMPL or any of its directors, officers, employees and personnel do not accept any responsibility for the editorial content or its accuracy, completeness or reliability and hereby disclaim any liability with regard to the same. Stock picks and mutual fund snapshots are not exhaustive and should not be construed as recommendations.