- Raghvendra Nath
The fireworks in the market have started many months before Diwali. Amid unabated negative news, most of us hope that the Diwali of 2019 would bring in some lights of hope in the otherwise beleaguered markets. What started as a short term debt crisis in 2018 has turned into a full-blown Economic Slowdown. Post the General Elections, the consumption demand seems to have shrunk suddenly and almost every sector is feeling the pinch to a lesser or larger extent.
Both Debt and Equity markets have been the hardest hit. And since nearly all the assets in the mutual fund industry are either in Debt Funds or Equity Funds, the mutual fund industry has been the most affected both in terms of performance as well as flows, as both the factors are interlinked.
The mutual fund industry has seen sharp deceleration inflows in Equity Funds. Year to date, the Equity flows have come down sharply to Rs.5080 crores, a drop of almost 40% as compared to the last 6 months of the previous financial year. If we exclude the strong SIP flows that the industry has witnessed in the last 5 years, the bulk investments into the Equity Funds have turned negative.
Generally, it is seen that the investors are more amenable to investing during the bull runs. With depressed returns for the last two years, it is unlikely that the Equity Segment of the MF industry would see any significant inflows in the next year or so.
Another segment of the industry that got severely impacted during the last 1 year was the Credit Risk Funds. After the IL&FS debacle, there have been a lot of downgrades and defaults. And most credit risk funds have had exposure to at least some of these papers and thereby their returns have been impacted. With almost 15 lacs crores in the Fixed Income mutual funds, the industry is a critical player in the debt markets. Its unwillingness to invest in some of the affected names and potential ones is actually contributing to the crisis of confidence that the debt markets are facing now.
While we have seen some challenging times, it must be said that the impact on the performance of most funds has been limited. The industry as a whole has acted in a very mature fashion in dealing with the downturn. Except for a handful of debt funds, most fixed-income funds have been able to protect capital because of adequate diversification, lack of concentrated exposures and overall better quality of papers. The fact that the industry has been able to keep its head above water in one of the worst credit crisis that India has seen, gives a lot of hope that the fixed income industry shall grow from strength to strength.
On the Equity Funds side, most of the risks have been played out. Whether it is the debt crisis, auto sector slowdown, the stress in the real estate sector, low GDP growth, fiscal stress, etc, most of the risks are out in the open and built into stock prices. Any improvement in macroeconomic parameters and corporate fundamentals would have an immediate positive impact on prices and thereby the MF NAVs. While the short term uncertainties are likely to continue, the medium-term outlook is looking quite positive.
As we go past the festival of lights, it is safe to say that most of the risks have already played out as far as both Equity and Fixed Income markets are concerned.
Savings from approximately 250 million households in India have grown at a steady pace in the past few years, with an accelerating share of financial savings, especially after the implementation of revolutionary reforms such as demonetization and GST, in fact, the share of gross financial savings in total gross household savings has gone up from 41% in FY 13 to 51% in FY 18.
A young, aspiring population and a burgeoning middle class are likely to propel disposable incomes as well as savings in the country over the next few years.
A promising future for the India’s domestic mutual fund industry is growing from strength to strength, given that the penetration of mutual fund products is a fraction of the global average and is lower than that of both developed and emerging economies.
The industry is well-poised for strong growth, catalyzed by rising awareness among investors, a formalizing economy and growing financial inclusion. An important development in recent years has been the stabilization of Indian financial markets and equity markets, in particular, owing to the growing prominence of domestic institutional investors, including mutual funds.
The mutual fund industry’s growth story will span across a longer time frame and the industry is well poised for exponential growth.
The author is the Managing Director of Ladderup. Views expressed are the author’s personal.