Short to medium term returns from several schemes is slowly starting to looking very ordinary, despite the Sensex and the Nifty near peak levels.
In fact, the one and three year returns are looking very ordinary for the large cap mutual fund schemes, while for the small and mid cap schemes, the one year returns are reasonable. Remember, that long term capital gains tax benefits on mutual funds has been done away with, so there remains no tax benefit as well.
Over a three year time horizon, if ultimately the returns start looking like bank deposits, investors may start losing patience, given that there is greater risk in equity mutual fund schemes, than bank deposits.
Let us see returns of some of the really large sized funds, which invest in large caps. ICICI Prudential Value Discovery Fund has given returns of 6.29 per cent over 1 year and 8.17 over three years.
In the case of Aditya Birla Sunlife Focused Equity Fund it is 7.35 per cent in one year and 10.95 per cent in the last three years. HDFC Equity Fund has generated a one year return is 5.14 and 10.34 for 1 and three years respectively.
For the small and midcap funds, which at one stage reported even returns of 20 to 30 per cent per year, there has been a sharp downtick, due to collapse in prices of small and midcap stocks. In fact, the last one year returns are just about good. ICICI Prudential Midcap Fund has given returns of 10.98 per cent, while others like HDFC Midcap Opportunities Fund, L&T Midcap Fund, Kotak Emerging Equity Scheme etc., are all in that 8 to 9 per cent range.
The problem going ahead
While the 5 year returns from most mutual fund schemes has been good, the problem right now is over the next one year those returns might starting looking dismal. The reason for that is simple - exactly 5 years ago the markets started rallying on hopes that Narendra Modi would form a government, which he did.
Now for returns to stay, the market has to gather strong momentum in the next one year with a lot of political uncertainty, inflation, rising interest rates, rising crude oil prices etc.
The one thing that will keep the momentum going is the fund flows into mutual funds. If there is a reversal, we might see markets falling and hence returns. Until then, one needs to tread cautiously.
The long term investment myth!
The whole business of investing for the long term in mutual funds is a myth. If I have invested in the long term, and suddenly there is a Lehman Brothers type crisis and I need the money for a marriage, I am trapped. I may have to liquidate at losses. What if there is a sudden sickness and the markets are in bad shape - can I really play for the long term?
The simple thing is try and time the markets, especially if you are investing lumpsum. Buy mutual fund schemes on declines and sell on rallies. We are presently seeing a sudden crazy collapse in mid and small cap stocks, which has led to a sharp fall in schemes of mid cap and small cap funds. If we had to invest a lumpsum in these schemes six months back, we would have been in trouble.
Bank interest rates are rising. In fact, small finance banks can give returns of as much as 9 per cent. So, if markets are high, there is little need to chase them. Wait for a decline, before buying into mutual funds.