Mutual Funds

Volatile and credit-risky — the turbulent year that was

Dheeraj Singh | Updated on December 30, 2018 Published on December 30, 2018

Let’s rewind 2018 to take a look at the significant events in the mutual fund industry

The year 2018 has been one of significant developments for Indian financial markets, especially so for mutual funds.

It brought market participants back to reality with both mid- and small-cap stocks witnessing significant decline in prices after a rather easy ride in the previous two years.

Equities

While the performance of large-cap-focussed benchmark indices, like the Nifty 50 or the BSE 100, barely broke even year-to-date, mid- and small-cap indices showed significant declines of as much as 35 per cent in some cases.

Mutual funds are naturally not immune to these gyrations in the equity market, and most funds barely managed to break even on their returns year-to-date. Coming after extremely healthy returns in the 2014-2017 period, this may have left several investors disappointed. This would have been especially painfully for the newer crop of investors who probably invested in equity mutual funds for the first time and, therefore, were yet to be exposed to market cycles.

Volatility is an inherent feature of financial markets. It is imperative that the mutual fund industry does its bit to educate investors on this and also demonstrate money management skills that convince investors that staying invested for a medium to long period of time eventually evens out the bad with the good and delivers superior risk-adjusted returns.

Debt

While much of the focus has been on equities and equity mutual funds, let us not forget that the industry size is made up predominantly by debt and liquid funds. This category, too, witnessed significant upheavals in 2018.

The troubles at infrastructure conglomerate IL&FS and the subsequent defaults roiled many a fund which had exposure to the ‘highly rated’ group.

Many funds were forced to write down their exposure to the group due to the defaults by IL&FS group entities. Expectedly, investors — who expect liquid and debt funds to show steady returns with a focus on capital protection — were nervous and worried due to the sharp fall in the net asset values of these funds on account of the write-downs.

The silver lining to this crisis was that SEBI was forced to take a holistic view of the credit risks inherent in mutual funds, and, in a pragmatic move, decided to allow funds to segregate (‘side-pocket’) their troubled or bad assets’. Earlier, the market regulator had steadfastly opposed the creation of side-pockets by open-ended mutual funds.

Overall, it was a very interesting year for the fund management industry with several learnings for the future.

The health and the likely pace of growth of the industry will greatly depend on how much of these learnings are used to provide better performance and improved service standards to the ultimate customer — the fickle Indian investor.

The writer is Head of Investments and Fund Manager - Fixed Income at Taurus Mutual Fund

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