Savers caught in stampede as equity mutual fund returns turn negative

Domestic investors poured Rs 1.5 trillion ($23 billion) into these funds between April and January

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 Rs 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 Mumbai-based 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.