Mutual funds have been a preferred source of investment for passive as well as novice investors, especially through the well-established systematic investment plan (SIP) route. However, are they good for investment now?
How are mutual funds doing these days? Has their performance been impacted by the Covid-19 pandemic or the market volatility? Is it the right time to invest in mutual funds? Such questions are hovering in the mind of investors for quite some time, particularly after the Franklin Templeton episode.
Industry experts, however, say that mutual funds have been a preferred source of investment for passive as well as novice investors, especially through the well-established systematic investment plan (SIP) route. In fact, the total number of outstanding SIP accounts as of May 2020 stood at 3.20 crore, with 15.58 lakh new SIPs registered over the last 2 months, as shown in the table below.
The SIP contribution per month into various equity schemes has risen from Rs 3122 crore in April 2015, to a steady inflow of more than Rs 8000 crore for 18 consecutive months.
Over a 5-year period between April 2015 and May 2020, on an annualized basis, debt mutual funds have provided better returns to investors as compared to equity mutual funds.
“This is due to the fact that equity markets witnessed severe correction in the last quarter of FY20, with the Nifty50 index itself falling by ~40% in a matter of two-and-a-half months. All equity funds registered negative performance in a range of 25% – 40% and wiping away the gains of the last 4 years. In spite of the dramatic fall, investors continued with their SIPs, in expectation of a recovery and better returns performance in a post-Covid scenario,” says Tejas Khoday, Co-founder and CEO, FYERS.
Type of funds doing better these days
Since the Nifty 50 lows of March 2020, the stock market has recovered 38.5% and most equity mutual funds have reflected this up-move, with an excellent performance over a 3-month period.
Equity Contra, Equity Focused and Dividend Yield funds have given returns exceeding 30%, while large, midcap, small cap, sectoral funds have registered returns of ~26-29%. Debt and Hybrid funds under-performed due to the nature of their investment objective.
“With focus on healthcare due to the Covid-19 pandemic, investors flocked to the Pharma sector funds with the Nifty Pharma index witnessing an up-move of 52%. ICICI Prudential Pharma Healthcare and Diagnostics (P.H.D) Fund – Direct Plan returned 46% over the last 3 months, with UTI Healthcare – Direct Plan and Nippon India Pharma Fund – Direct plan providing 41% returns each,” says Khoday.
The next best sectoral indices were Nifty Energy with 45% returns, followed by Nifty Infra at 44% with ICICI Prudential Commodities Fund – Direct Plan giving 38.8% return, while Nippon India Power & Infra Fund – Direct Plan provided 33.6% return.
Which funds are good for investors?
Equity mutual funds are subject to market risk and the returns are tied to the performance of equity markets. With the Indian economy under distress due to the Coronavirus pandemic and other internal issues, with restricted spending by the government and lower investments by private players, expecting a similar continued performance in the short term may not be appropriate.
In these conditions, “systematic investment plan is the preferred option. A 5 or a 10-year SIP in an equity mutual fund is bound to provide good returns, but it is imperative that investors look at investing in mutual funds with a longer-term view. Depending on an investor’s risk appetite, investment capability, financial goals and horizon of investment, a diverse set of mutual funds can be selected, which could help in wealth building and retirement planning. A financial planner or an investment adviser’s services can be opted, who can understand each investor’s requirement and provide the necessary choices,” advises Khoday.
For experienced investors following the Do It Yourself (DIY) strategy, choosing an appropriate platform to invest is essential and can help in eliminating administrative hassles. “FYERS, as a responsible and investor oriented stock broker, is planning to launch a mutual fund portal in the near term, offering direct plans, through which investors can select their schemes and invest appropriately,” he says.