Mutual Funds review: How have the Industry and the markets performed?

Market Update

• Indian equities was clearly an outperformer compared to most global peers in CY23, more in mid and large cap space. Interestingly, this was amidst geopolitical tensions, rise in key policy rates across the globe and volatile commodity prices.
• As we embark on CY24, there are greenshoots in the form of continued corporate earnings momentum domestically, healthy GDP growth, benign commodity prices outlook  as well as likely rate cut globally. Thus, there seem to be more positive than negatives ahead. Amidst this setup, India is in a sweet spot vis-à-vis global peers with macroeconomic stability and corporate earnings in sight.
• Corporate earnings recovery has been healthy in the recent past with Nifty earnings growing at 22% CAGR over FY20-23. Going forward, introducing FY26E, we expect Nifty earnings to grow at a CAGR of 16.3% over FY23-26E.
• Debt market perform in cycles. Every down-cycle is followed by an up-cycle. The current up-cycle which started from June 2022 which 10-Year G-Sec yield was around 7.6%. The rally in the current cycle has just started which may last another 12-15 months with yield moving down towards 6.25%. Annualised return during the current cycle could be around 11% with incremental return in the year calendar year 2024 around 12%-14%.
• In previous two rate-cut cycle, the rally in Government bonds precedes the actual Repo rate cut by RBI. In 2015 rate-cut cycle , the 10-year G-Sec yield declined by around 115bps between April 2014 till January 2015. The total rate cut during the cycle was 200bps. Similarly, 10-Yr G-Sec yield declined by around 70bps during September-December 2018 before the start of the rate-cut cycle in February 2019 which last for 135 bps.

Industry Synopsis

• The last two month of calendar year 2023 witnessed a significant rise in the AUM of the MF industry to all-time high at Rs 50.8 lakh crore as compared to Rs 46.7 lakh crore in October 2023 and Rs 49.0 lakh crore in November 2023.
• Overall the year 2023 saw the growth of 27% in total AUM with the highlight being 43% growth in the AUM of equity oriented schemes. AUM of equity oriented schemes has grown from Rs 15.2 lakh crore in December 2022 to Rs 21.8 lakh crore in December 2023.
• The year 2023 saw inflows of Rs 1.6 lakh crore into equity schemes after similar inflows of Rs 1.6 lakh crore during the year 2022.
• Monthly SIP flows have increased from Rs 13,500 crore in December 2022 to Rs 17,600 crore in December 2023.
• Inflows were significantly higher in smallcap funds (Rs 41,000 crore) followed by Midcap funds (Rs 23,000 crore). Largecap funds saw outflows of Rs 3,000 crore in the year calendar year 2023.
• Debt funds witnessed outflows across major categories during the year with total outflows amounting to Rs 46,000 crore in 2023.

Performance Highlights

• Infrastructure funds have seen significant outperformance in the year 2023. Infra funds have outperformed since last three years as cyclical sectors outperform from capex related expenditure driven by Government spending. Such continuous outperformance in last 3 years is only second time since 2005-2007. 
• Auto and logistic funds have also outperformed in last two years against very low expectations
• IT funds made a strong comeback   in the calendar year 2023 after having underperformed significantly in the year 2022 tracking global market performance. In general, IT funds are the most consistent performing sector funds.
• Banking funds underperformed in the year 2023 as investors booked profit after its outperformance in the year 2022. PSU banks however outperformed significantly. PSU banks have now outperformed significantly in last 3 years. The are by far the best performing segment in last 3 years.
• Small cap funds continue to perform well and have outperformed consistently since last 4 years. Such continuous outperformance for 4 years only second time in the history and similar to 2014-2017 period. The risk-return trade-off looks unfavourable and investors may avoid putting lumpsum amount in the category.