Equity returns to be moderate, interest rates to taper

Retail investors who may have been spooked by falling returns from their equity mutual funds (MF) this year can look forward to a less volatile market in the second half of 2019. While fixed deposits may lose their sheen given that interest rates are likely to decline, investors can look at debt funds with a two-to-three-year time frame.

This year saw excessive volatility due to instability of crude oil prices, weakening of rupee and state elections. However, the market did recover by the year-end, proving that investors must be prepared for ups and downs.

Safe haven assets outperformed this year, while riskier assets underperformed, said Vinod Karki, head of strategy, ICICI Securities. "The dollar (up 10.2%) beat most asset classes, followed by gold (5.9%), bonds (5.1%) and NIFTY50 (4.1%). Mid-caps and small caps underperformed significantly at -15% and -29.3%, respectively," he said.

Due to the increase in interest rates, returns from debt MFs were moderate too, said Raghvendra Nath, MD at Ladderup Wealth Managment.

While foreign institutional investors pulled out money from Indian equities for many months, the flow of systematic investment plans (SIP) into the market was consistent. The average monthly SIP flows were approximately Rs 7,500 crore in 2018 versus approximately Rs 5,600 crore last year, said Rusmik Oza, senior vice-president, (head of fundamental research), Kotak Securities.

Retail investors would do well to continue with this faith in the power of regular investing in 2019 as well, said experts. In fact, investors will have to look out for more volatility in 2019 until the outcome of the general election, after which the equity market performance would be more stable.

"Investors should not stress much on the extreme volatility as it would extend only for a certain time frame. Before general election results are out, fixed income investment would be a good option. But that does not mean one should transfer funds from equity to fixed income,'' said Brijesh Parnami, ED and CEO, Essel Finance Wealth Services.

Globally, central banks are coming out of the low-interest rate regime cycle. But in India, with the possibility of interest rates coming down in 2019, one can look at shorter duration debt funds and/or debt-oriented balanced funds.

"Corporate bond funds would be a good choice for investors for the next three years' perspective since they are sitting on high yield portfolios and any softening of interest rates will result in mark-to-market gains," said Nath.

Exposure to accrual MFs with a three- to five-year perspective, too, is a good option. "With the global interest rate cycle likely to peak out in the first half of 2019, investors can take advantage of stable to declining interest rate regime from 2020 onwards along with indexation tax benefits," said Amit Jain, co-founder, Ashika Wealth Advisors.

Investors who are under-exposed to equity but wish to have higher allocation towards it can invest in the first half of 2019 as local and global events continue to drive the market volatility, said Nath.

But one should be prepared for moderate returns from equity markets, at around 10% from equities, said Karki.

Investors who are open to some amount of risk can invest in mid- and small-cap stocks and funds. "We expect mid and small caps to outperform large caps. We are seeing earnings growth of mid-caps coming out better than large caps and same is the case for future earnings estimates,'' said Oza.

According to Jain, the second half of 2019 will have a better entry point in the equity market, from medium to long-term point of view. Till that time, it is advisable for investors to remain invested either in arbitrage funds or equity saving scheme depending on their risk appetite.

For retail investors, the need for portfolio allocation and risk diversification remains the same, irrespective of returns from various asset classes. Portfolio diversification broadly depends on two major factors: one's goal and risk appetite. Your age is another factor you must consider, said Parmani.