Why Mutual Funds Are Showing 1-Year Returns of 70-80%?

If an investor is investing in equity mutual fund schemes and is looking at the track record of the last 1-year, he is going to be stunned. There are many equity mutual funds that are showing returns of 50, 60, 70, 80, 90 and even 100% returns in the last 1-year. Let's take a look at some of these, though the list is not exhaustive.

Name of the fund	1-year return
SBI Small Cap Fund	99.91%
Union Small Cap Fund	98.51%
Axis Small Cap Fund	88.47%
Tata Midcap	75.20%
Mirae Emerging Bluechip	78.71%
UTI Flexi	72.20%
Tata Largecap	62.20%
DSP Flexi	64.41%

Now, let's see one of the biggest reasons for mutual funds generating such a stellar rally over the last 1-year.

Sensex closing May 18, 2020	Sensex closing May 14, 2021	% Change
30028.98,	48,732.55	62.29%

At the same time last year, the Sensex was hovering around the 30,028 points mark, while the Sensex now is around 48,732.5, which itself is a gain of 62.29%. So, the Sensex has rallied 62.29%, thanks to the slump in the markets last year, due to the lockdown after Covid-19 infections surfaced.

Honestly, there is nothing much to read into the stupendous returns of equity mutual funds over the last 1-year, except the fact that there has been crazy buying by FPIs in the last 7-10 months, which has pushed benchmark indices higher.

Will the solid returns continue for equity mutual funds?

Markets are over priced at these levels as the price to earnings multiples for the Sensex and the Nifty are way above historical averages. However, the world is flush with money from low interest rates and easing, which should continue to push stocks higher. These days liquidity matters and fundamentals take a back seat. It will not be a surprise to see markets moving even higher from here, given the low interest rates across the globe. Unless inflation surfaces and interest rates rise, stock markets are not going to fall in a hurry. This means that the returns from mutual funds would continue.

As far as investors are concerned, it would be advisable not to invest large sums in the stock markets. A better option would be to invest money through SIPs as you would be able to hedge your risks. Investors with a long term perspective may stay invested, however, it is also not a bad idea to take a little bit of money and keep liquidity, so as to invest at lower levels.