Riding the wave of the equity market, the mutual fund (MF) industry experienced double-digit growth in Samvat 2079, concluding the Hindu calendar year close to the Rs 50 trillion assets under management milestone.
After a subdued 6 per cent growth in Samvat 2078, the industry’s assets surged over 18 per cent last year to Rs 46.7 trillion.
Industry players anticipate that Samvat 2080 will also be a fruitful year for the asset management industry, given the strong inflows from retail investors, particularly through the systematic investment plan route.
Most believe that debt funds will attract higher flows over the next 12 months as the interest rate trajectory could trend lower throughout the year.
During Samvat 2079, debt funds were at the bottom of the pack in terms of net investor flows into various scheme categories.
Active debt schemes attracted a net inflow of Rs 10,730 crore compared to the Rs 1.2 trillion outflows in the previous year.
Although the flows improved significantly, they could have been higher if not for the change in debt fund taxation in April, which dimmed the appeal of debt schemes at a time when yields were becoming attractive.
The one-year return of debt funds has ranged from 5.5 per cent to 9 per cent.
The performance of some categories is expected to improve further going ahead.
“The next two to three years could be a golden period for debt funds from a performance point of view.
"With the central bank expected to bring down interest rates from next year, debt funds will be in a position to deliver better returns than traditional investment options.
"Also, there will be an added tailwind in terms of additional demand due to JPMorgan bond index inclusion,” said Rushabh Desai, founder of Rupee With Rushabh Investment Services.
Another emerging trend in recent months, likely to be sustained in Samvat 2080, is the increased uptake of hybrid funds.
Fund houses have placed a higher emphasis on hybrid funds since the announcement of the change in debt fund taxation, and their efforts are translating into higher inflows.
In the one year ending October 2023, multi-asset allocation funds attracted a net of Rs 19,200 crore. Balanced advantage funds, after experiencing continued outflows between October 2022 and June 2023, are also back to registering positive net flows. “Asset allocation as a theme will catch up further. In the coming years, multi-asset and other hybrid schemes will draw higher attention,” said G Pradeepkumar, chief executive officer, Union MF.
While many believe smallcap schemes will continue to attract strong flows in the near term, the tide could turn if there is a correction in this space.
Smallcap schemes were the biggest grossers last year among active schemes across categories, raking in over Rs 37,100 crore.
Sectoral funds and midcap funds were the other top-grossing funds.
Experts say the surge in inflows into these schemes was largely driven by their past performance.
“In the past year, the stars have been smallcap and midcap funds, both in terms of attracting flows and performance.
"To some extent, the performance has been supported by money being deployed by MFs itself.
"Money has been flowing into smallcap and midcap stocks not just through the specific funds but also from multicap, flexicap, largecap, and even hybrid funds,” said Pradeep kumar.
Performance-wise, equity funds witnessed a reversal in fortunes, with most active largecap fund managers, who generally struggled to outperform, beating the index handsomely.
On average, active largecap funds have delivered 12.4 per cent in the last year compared to 8.5 per cent by the National Stock Exchange Nifty50 passive funds, according to Value Research data.
At the same time, most passive midcap and smallcap funds trailed the key benchmarks in these segments.
Passive funds tracking Nifty Midcap 50 and Nifty Smallcap 50 have delivered the highest returns at 34 per cent and 45 per cent, respectively, in their categories.
Active midcap funds have delivered 24 per cent on average, while smallcap funds have given 30 per cent.
Many believe the returns generated by smallcap funds could plateau going ahead, toning down the exuberance in this space.
Analysts suggest that investors, who have made gains by investing in smallcaps, should consider rotating out and moving into largecaps.
Overall, net investments into active equity schemes between November 2022 and October 2023 stood at Rs 1.4 trillion, 36 per cent lower than the previous Samvat (November 2021-October 2022).
The decline was largely due to profit booking in the latter part of the year.
