Savers caught in stampede as fund returns turn negative

Indian savers stampeded into equity mutual funds (MFs) at a record pace, just in time to see their holdings tumble in a market rout that sent stocks plunging.

Domestic investors poured ~1.5 trillion ($23 billion) into these funds between April and January -- more than double the whole of the previous fiscal year, according to latest data from the Association of Mutual Funds in India. Balanced funds, which offer the benefits of stock returns with some cushion from debt, saw flows triple as Prime Minister Narendra Modi's clampdown on cash pushed hordes of first-time savers into the financial markets.

However, they’ve since been hit by a double whammy: the government this month said it will tax gains made on stocks held for more than a year and bonds are poised for the worst sell-off since 1998 as global interest rates rise.

315 equity funds tracked by Bloomberg lost an average 2.8 per cent in 2018

32 balanced funds tracked by Bloomberg lost an average 1.8 per cent

Benchmark S&P BSE Sensex index gained 0.8 per cent this year

It will be tough to make profits in stocks in 2018 and while bonds may offer some respite, investors should brace for volatility in this market too, said Roopali Prabhu, head of investment products at Mumbaibased Sanctum Wealth Management Pvt, which oversees $934 million in assets.

Savings will take longer to accumulate and the path “is not without bumps,” she said.

Prabhu recommends investments in accrual funds, which earn returns from interest on bonds held until maturity, and declined to “hazard” a guess on potential stock performance. At risk

The Sensex will return about 8 per cent to 10 per cent this year after the introduction of the long-term capital gains tax, predicts Chakri Lokapriya, who helps oversee $3 billion as managing director at TCG Asset Management. That’s lower than the 10-year average of about 12 per cent.

Moreover, “diminished overseas flows due to the LTCG is likely to make capital availability tighter for corporates, lowering their equity return potential and thus less rewarding for a domestic middle class saver,” he said by email.

Only those who can wait for five years stand to make money in equities, said Kaustubh Belapurkar, director of manager research at Morningstar Investment Adviser India. Investors with a horizon of less than three years could consider higher-yielding credit-risk funds, he added.

‘Valuation catch up’

Risk also stems from the prospect of tightening by the central bank, which turned more hawkish last week as inflation is forecast to accelerate.

Conservative investors should reduce allocation to mid-caps and small-cap stocks, recommends Unmesh Kulkarni, head of markets and advisory solutions at Julius Baer Wealth Advisors India Pvt, a unit of the $412 billion global wealth manager. Bond investors should opt for short duration funds while those looking for longer term exposure should do so only gradually, he said in an interview.

“Current selloff in Indian equity markets is primarily driven by correction in global markets; there’s no scam or systemic risks,” Kulkarni said.