Expect mid-teen return, higher volatility in 2018: Fund managers

Mutual fund sector should continue to see rapid pace of growth in inflow and rise in SIP accounts

The Rs 23-lakh crore mutual fund (MF) sector seems likely to continue with high trajectory growth in 2018. However, investors are also being cautioned by fund managers to reduce their expectation on returns to about the mid-teens, against the 30-plus per cent the year 2017 offered.

According to some top fund managers, the market in 2018 would be more volatile. The possibility of knee-jerk reactions is present. The caution comes on the back of macroeconomic challenges, both domestic and global, which could upset the market during the course of next year.

Sunil Singhania, global head of equities at Reliance Capital, says: "2018 will be challenging as far as macro factors are concerned. In a scenario of rising interest rates globally and the possibility of a pause in rate cuts in India, I believe the markets will be more volatile in nature. Investors should rationalise their expectations to mid-teen kind of returns."

It is worth highlighting that corporate earnings over the past three years have not gained momentum as fund managers had expected. However, they are still optimistic, that earnings will improve substantially in 2018-19 and balance the impact of those macro factors.

Mahesh Patil, co-chief investment officer (CIO) at Aditya Birla Sun Life MF, says: "Two factors make us optimistic in 2018. Economic recovery post the twin phenomena of demonetisation and implementation of GST (the goods and services tax) should pick up the pace. This will largely be driven by private consumption, while capital expenditure and exports would be supportive. Second, we see corporate earnings coming back meaningfully and broad-based, across sectors. We estimate to close FY18 with 10 per cent and FY19 with 19 per cent earnings growth on Nifty50 companies."

However, Patil adds, there are headwinds in the form of an increase in inflation across the world, including in India, which might compel central banks to tighten policy rates. "Investing in markets with a three to five-year horizon, with a mid-teen return expectation, should be rewarding," he says.

Fund managers also advise that investors look more for balanced funds with a dynamic asset allocation strategy, to face the coming volatility in markets. If one prefers equity schemes, large-cap ones must be the priority.

S Naren, CIO of India's largest fund house, ICICI Prudential MF, agrees that the uncertainty of global events can't be set aside completely, amid continuously patchy earnings recovery on the domestic front, which could make the market volatile in the near term. "The Indian equity market is in a mid-cycle, with parameters such as the capital expenditure cycle, credit growth and capacity utilisation yet to improve. Corporate earnings are likely to recover as capacity utilisation improves, which is likely over the next two years," he says.

Naren advises investors to continue with existing Systematic Investment Plans (SIPs). "For new investors, we recommend investing in dynamic asset allocation schemes. Investors looking for participation through fully diversified equity schemes could consider large-cap oriented ones," he adds.

On the debt category of funds, he feels that from a one-year view, debt remains an attractive investment opportunity. However, from a three-year horizon, return expectations have to be moderated.

Interestingly, though fund managers have a mix of caution and positive views for investors, the sector's chief executives continue to remain buoyant about growth in the sector. According to A Balasubramanian, chief executive at Aditya Birla Sun Life MF, "The buoyancy of inflow into MFs is expected to prevail all through 2018. As the industry goes deeper into the country, I expect even greater participation in equity and a continuous surge in SIP. Balanced (funds) as a category may continue to remain a popular choice."

Nimesh Shah, managing director at ICICI Prudential AMC, agrees. "We believe the current trend of investors opting for financial assets over physical assets is likely to continue and, therefore, the SIP culture is likely to entrench in the MF investment landscape."