The Hindu Business Line : Reality check on MFs

Last year, MFs witnessed record returns to investors - sector returns in equity funds were about 116.44 per cent and debt funds averaged over 7.6 per cent. These returns would be very difficult to replicate this year, say chief executive officers of mutual fund houses.

The situation is especially grim in the near term with the politics-linked turmoil in the securities and debt markets. Sector-wise allocations of fund houses are being reworked and investment strategies are being redrawn in order to ensure "reasonable returns at bearable levels of risk".

Fund houses say that despite the markets going on a free fall, redemption pressure is not very high currently as investors, particularly retail investors are reluctant to book losses. "It might, however, be very difficult to get fresh inflows at this stage," said Mr A.K. Sreedhar, Chief Investment Officer, UTI Asset Management Company Private Ltd.

Debt funds had braced themselves for lowered returns as interest rates were headed northwards. The ideology and early indications of the new Government has forced fund houses to assume that the rise in interest rates would now be sooner than anticipated. Also, international trends and the immediacy of the US interest rates hike indicate that debt markets would be highly volatile.

Asset management companies expect the equities market to be choppy in the short-term, though they are optimistic about it being stable in the mid to long term. "We have utilised the crash in the market to pick up scrips that we feel came into attractive price levels. But we do need to factor in the likelihood that PSU privatisation will go slow. The crazy good days are over, it's time to be realistic now," said Mr S.V. Prasad, Chief Executive Officer, Birla Sun Life Asset Management Company Ltd.

"We have re-looked at some sector strategies, in light of these events. These would be further modified depending on the events that take place over the next 10-15 days," shared Mr Sanjay Prakash, Chief Executive Officer, HSBC Asset Management (India) Private Ltd.

While fund houses agree that it may take the markets about 3-6 months to stabilise, they caution that despite the stability, returns would not be comparable to that of the previous years - in equity, hybrid and debt funds. The highest return in equity funds in the last 12 months was 183 per cent, and 38 funds had performed above the average returns of 116 per cent. Similarly in debt, funds have returned as much as 9.83 per cent last year, a figure that looks completely unattainable now.

Investment planners say that balanced funds and monthly income plans (MIP), last year's favourite, would be rendered unattractive in the current market conditions. "MIPs would not perform well in a situation where debt returns would definitely be diminished and equity returns are rendered extremely unpredictable," said a Mumbai-based financial planner.

The mutual fund houses, for want of better options, are playing the wait-and-watch game.

While industry observers agree that investments in funds would still be attractive options as compared to other small savings returns, the key to luring the investor will lie only in innovative products.