Should Mutual Fund Investors Worry With Returns Beginning To Drop?

The last 1-year has been tremendous for equity mutual fund investors. Most of the large cap equity schemes have given 1-year returns between 12 to 18%. That is fantastic by any stretch of imagination.

Returns in 2022 are unlikely to be like 2021

There is no denying that returns of the past few years have been terrific for mutual fund investors. The one reason for good returns is mutual fund investors themselves.

They poured money into equity mutual funds, who in turn poured money into the stock markets, which propelled the markets even higher.

Axis Bluechip Fund is one of the largest equity mutual funds, with assets under management of nearly Rs 34,000 crores. The 3-months returns from the fund is -5.33, the 6-months return is 0.44 and the 1-year returns is 13.48.

Now, the worry is a lot of money poured into equity and balanced funds in the last 6 months. In fact, flows into equity mutual funds hit 25,000 crore in December on strong SIP (systematic investment plan) numbers and robust inflow into multi-cap fund category. The same was the case with Jan 2022 where numbers were around Rs 14,000 crores in terms of inflows.

If these set of investors keep seeing poor returns in the next few months as well, panic might start. Those who have poured money over the last 3 to 6 months are already seeing negative returns.

Foreign Portfolio Investors are selling Indian equities

Foreign Portfolio Investors are selling Indian equities
One of the reasons for the poor returns of the last 6 months or so, is that Foreign Portfolio Investors are selling into Indian stocks. Some of them are moving money to China as they believe the markets there offer better opportunities.

FPIs have net sold in the Indian markets to the tune of Rs 30,000 crores in the month of Feb 2022 so far.

They net sold in the cash market to the tune of slightly over Rs 40,000 crores in the month of Jan, 2022.

Another reason for the move is that interest rates across the globe are rising. The US Federal Reserve is slated to hike interest rates later in March and may raise interest rates at least 4 times this year.

Interest rates on the rise in India as well

Bank deposit interest rates in India too are on the rise. Several large banks have already raised their interest rates on fixed deposits. Globally, interest rates are rising as inflation poses a real threat to the economy. With interest rates expected to rise faster, we expect that fixed deposits over the next 1-year would be something to be looked at.

In fact, there is a possibility that returns from mutual funds would not be the same like in 2021, which was a superb year for equities. In fact, those who invested in equity mutual funds about 2 to 3 years are in a sweet spot now. However, those who have begun about six months ago, are facing issues with regards to returns.
We suggest that those who are sitting on healthy profits over the last couple of years, at least partially withdraw to protect capital.