Mutual Fund Performance Review & Strategy Insights – October ‘18

September was a bearish month for the equity as well as debt markets. While the NIFTY took a fairly steep cut of 6.4%, the real losers were the mid and small cap funds, which witnessed drops of 15% or more in their net asset values over the course of the month. Anecdotal evidence indicates that first time investors who got into Mutual Funds in 2018 are already suffering the jitters and beginning to second guess their decisions to migrate from the haven of fixed deposits. This effect would be more pronounced within the community of unadvised investors, who would be more unclear on what to do with their beleaguered portfolios at the moment.

Equity Funds
Not surprisingly, the top performers in the month were all international funds, as the domestic markets took quite a drubbing across sectors and market caps. Even Pharma funds, which have been in a major bullish uptrend for the past few months, underwent corrections of 4% to 6%. Banking sector funds were at the receiving end of some severe punishment, with PSU based ETF’s from the Reliance and Kotak stables taking hits of 18%, and ABSL’s Banking & Financial Services Fund falling by 17% in the month. HSBC Brazil Fund, a hitherto unimpressive performer for the better part of the year, was the surprise top performer for the month with an 8.77% return. A word of advice for investors at this stage: do not rush into international funds simply based on the recent spike in return. Global markets have been and will continue to be extremely volatile for the next few months, and what goes up could just as well come down.

Debt Funds
The top performer of the month within the debt space was IDFC G Sec Fund - Constant Maturity Plan. However, this would definitely be an aberration, because the yield on the 10-year G-Sec actually rose by 0.87% within the calendar month, and the 6.55-year modified duration of the fund would lead to a straight up mark to market loss of 5% or thereabouts. It is likely that the fund (which is a small, 19 Crore fund) underwent some sort of churn which resulted in the coincidental purchase of its portfolio at the peak intra-month yield of more than 8.2%. With the credit market spooked by the IL&FS default, and duration risks still looming large on the back of the falling rupee and rising crude, its no surprise that short maturity liquid funds reigned supreme last month; with the top performers coming from the liquid fund space. The Credit Risk funds from the DSP and Invesco stables plummeted more than 2% each within the month. Even ultra-short-term funds were not spared, with Principal’s and Motilal Oswal’s offerings taking hits of 7.86% and 5.99% respectively. Why ultra-short-term debt fund managers are taking on such extensive credit exposures, is a question that investors – and the regulator - would like answered for sure!

Hybrid Funds
With both equity and debt markets not faring well, hybrid funds did not have a good month. A few small & mid cap-oriented hybrids fell by as much as 10% or more intra-month (BOI AXA, TATA and IDBI being the foremost among the laggards). Even conservative hybrids mostly fell by 0.5% or more within the month. The only hybrids that fared well were the arbitrage-oriented ones, which in fact benefit from market volatility that results in a higher spread between spot and futures prices. It is likely that the out performance from arbitrage-oriented hybrids will continue for the next couple of months.

Mutual Fund Strategy Insights
In tumultuous times such as these, sticking to the basics will stand you in good stead. Keep your SIP’s and STP’s running, follow an asset-allocation strategy based on your individual risk profile, avoid speculative trading, and don’t go rushing headlong into exotic investments without reading the fine print carefully. If your risk profile allows it, take a moderate portfolio exposure to Pharma & Healthcare sector funds as well as value funds. Pharma funds are likely to resume their uptrend post another couple of weeks of retracement. Be careful while entering IT sector funds, as a mean reversion is on the cards after the recent bullish move. Within debt funds, stick with the shorter end of the duration spectrum and be careful with respect to credit exposures. Large cap funds are looking better within the equity space, at least for the next year or so. Keep your guts about you and don’t do anything regrettable. Don’t worry, the tide is bound to turn sooner than later!