While 2014 was a blockbuster year for mutual fund investors, 2015 is likely to end on a very sour note. In fact, investors have been pouring money into mutual funds this year, in the hopes of generating solid returns, but, they might end with negative returns by the end of the year.

Take a look at some of the large cap and multi cap mutual funds returns in 2015:

There are a select few small and mid cap funds that have generated returns of even 12-15%. But the fund size is rather small. Most of the larger sized funds have not been able to generate good returns. In fact, at the same time last year, banks were offering deposit interest rates of near 9 per cent, which means you were better off there, if you compare one year returns.

Reasons for poor performance of mutual funds in 2015

One of the reasons for the poor performance of mutual funds is the fact that stock markets themselves have declined in the last one year as foreign portfolio investors have been pressing sales. From Sensex levels of near 27,502 points at the start of the year we are at 25,380 points.

Corporate performance has not picked up and foreign portfolio investors seem to be looking elsewhere for returns, especially in the light of a likelihood of interest rates rising in the US.

This has led to poor performance by mutual funds this year. Mutual funds had heavily invested in banking stocks like ICICI Bank and State Bank of India, which have seen their share prices falling sharply.

Would investment in mutual fund generate returns in 2016?

It's possible to tone down expectations of returns from mutual funds in 2016. If you are looking at solid returns of above 20 per cent, which you received in 2014, it is unlikely. One can tone down expectations and believe that returns of around 10 per cent would be more realistic from hereon.

The one reason is that we may not see robust inflows from foreign portfolio investors next year, given the fact that interest rate hikes in the US may continue. The second reason is that earnings may take time to recover and we would see an earnings re-rating only in 2016-17.

Thus, from a 2-year perspective mutual funds would be a good pick at the current levels.

GoodReturns.in