When we review 2018, we look at many changes in the financial world which were fast, unexpected and going to impact 2019. There were banking rules which got changed in 2018 to make our banking experience more pleasant and safer. The Income-tax rules too were changed to make us more disciplined and honest in paying our taxes and timely. The mutual funds’ industry also saw two major and bigger changes which are considered to be a game changer.
The first decision was re-categorization of mutual funds schemes by the regulator which changed the manner of portfolio construction for investors. The second other important decision was on reducing the cost of investing in mutual funds. Both these decisions are going to impact mutual fund’s investments in 2019.
The first question which will be hovering around investors mind is how should I approach my investments this year. 2019 is surely coming out to be an eventful year. It has started with India striking on terror camps in Pakistan. Now Lok Sabha elections will happen. Who wins and who loses will set the future course of the markets at least in the short term. Then there may be some policy changes or regulations which will also impact markets either ways. With such an uncertainty how should investors approach their mutual funds’ investments in 2019?
Mutual Funds in 2018
2018 was surely not a good year for equity mutual funds. Most of the active equity funds failed to beat their benchmark even though the market indices were running higher. The large-cap category considered to be more consistent has failed to deliver double-digit returns. On the other side, the mid and small cap scheme took the most beating and were down by almost 15-20%/. The other categories like a multi-cap, value funds, and focused equity funds also delivered single-digit returns. This is not the performance which investors would like to see in their portfolio. Contrary to this passive investing saw some solace where ETFs were able to produce double-digit returns. Even other schemes which remain in positive terrain were mainly passive mutual funds schemes. We are witnessing the emergence of Index Mutual Funds scheme in India after a long time. No doubt active versus passive investing debate will gather pace.
The debt mutual funds category too went through a tough time but still emerged as a winner in 2018. The IL&FS fiasco in 2018 shook the mutual fund’s industry. We saw some debt mutual fund’s portfolios especially the short term taking a big beating due to write off from IL&FS default. This also forced the regulator to come up with new guidelines. Overall the short term debt funds saw return generation in the range of 6-8% while long term debt saw returns in the range of 7-9%. Overall the debt funds category was more performance oriented in short term schemes.
What to Expect in 2019?
Now comes the bigger question- where you should invest in 2019 and should you change mutual funds strategy. If you have not realigned your portfolio post-Sebi re-categorization then it would be a good time to relook at your mutual fund portfolio. Add a blend of passive fund management from index mutual funds in the large-cap portfolio. So if you would have been holding 2-3 active large-cap mutual funds scheme them replacing one of them with a large cap index fund may be a wiser choice.
Given below are some good index mutual funds schemes with lower expenses-
|Mutual Funds Scheme
|Corpus (Rs. Cr)
|Expense Ratio (%)
|Tracking Error (%)
|Returns (% Annualized)
|HDFC INDEX FUND SENSEX PLAN-DIRECT PLAN
|UTI NIFTY INDEX FUND- DIRECT PLAN
|HDFC INDEX FUND NIFTY 50- DIRECT PLAN
|ICICI PRU NIFTY NEXT 50 INDEX FUND- DIRECT PLAN
If you see the return above then there is every reason to have them in your mutual funds’ portfolio.
Secondly, multi-cap funds are expected to do better and so having a larger share to these funds may be a good move. Though focused and value funds to give you a plethora of choice but also brings confusion. Look at your multi-cap portfolio and see you have enough of them in your portfolio.
Lastly, mid cap and small cap though are volatile they do good in enhancing your portfolio returns. Considering how these categories have taken a beating it may be a good time to include them in your portfolio.
Investors who have done their re-alignment post Sebi re-categorization need not bring any change in their portfolio. Your portfolio now needs a time horizon of 4-5 years to see how it is performing. Good to keep contributing even in turbulent times when markets will be down. For debt mutual funds investments investors should stick to short term funds this year. Short term and ultra-short term funds are ideal options for debt exposure.
With factors already emerging and elections around, it is expected that markets will be volatile. It’s advisable that investors follow an asset allocation even in the equity portfolio. With a mix of index funds, multi-cap fund, and mid/small-cap fund an efficient equity portfolio can be created. There will be many events where markets will be jittery. If you are a long term investor then any short term correction should be an opportunity which you should utilize.