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The mutual fund (MF) industry had an action-packed 2023 as it tackled the scrapping of tax benefits for debt fund investors and surging flows into equity funds.
Here’s what is likely in 2024 and which funds are better placed to deliver this year.
Equities start high
With the market delivering strong returns in 2023 (close to 20 per cent by largecaps and around 45 per cent in midcaps and smallcaps), the scope for similar gains is limited in 2024, say fund managers.
“Indian markets are trading at about 15 per cent valuation premium versus the 10-year average.
"In this context, while largecap stocks’ valuation multiples are trading at par, midcap and smallcap stocks are meaningfully higher than their 10-year historical average,” says Trideep Bhattacharya, chief investment officer, equities at Edelweiss Asset Management.
Global interest rate trajectory and its impact will determine the direction of equities, say experts.
Most fund managers were cautious about smallcaps and midcaps in 2023, but diversified funds like flexicap and multicap remain their top recommendation in the equity space.
Fund managers can tweak their allocation in these schemes depending on market conditions.
Long-duration debt funds
With the Reserve Bank of India (RBI) expected to start cutting interest rates from the second half of 2024, longer-horizon debt fund investors can hope for extra returns coming in by way of capital appreciation.
Fund managers advise investors to raise the average duration of their portfolios.
Most fund managers have raised the duration of their debt portfolios to the higher end of the mandate.
“With high starting yield and expectation of fall in bond yields, we believe that long-term government bonds offer investors a rewarding opportunity.
"Dynamic bond funds are probably best placed to capture this opportunity with the flexibility to change if things don’t pan out as expected,” says Pankaj Pathak, fund manager, fixed income, Quantum Asset Management Company, in his debt outlook for 2024.
Hybrids, the top choice
Equities are not attractive from a valuation perspective at current levels.
Debt yields are elevated and the rate cut cycle is expected to begin later in 2024.
Political uncertainties are likely as major economies, including India and the US, hold national elections this year.
The interest rate scenario is also at a crucial juncture. Considering these factors, hybrid funds are the right fit.
“2024 is expected to be a challenging year with valuations climbing higher due to front-ended returns.
"In the outlook for 2024, our key recommendations for new investors for lump sum remain hybrid and multi-asset allocation schemes which can be opportunistic in reducing equity exposure or moving to other attractive asset classes,” says ICICI Prudential MF in a note.
The company, which manages one of the largest balanced advantage funds, said its equity valuation index is in the neutral zone right, which means equities are not cheap.
Thematic could rule NFOs
When it comes to new fund offerings (NFOs), 2022 was all about passive debt or target maturity funds.
In 2023, MFs focused on the hybrid space.
In 2024, the thematic and sectoral category seems primed to witness the highest action, at least in the initial phase.
SBI MF has filed papers with the Securities and Exchange Board of India (Sebi) for two schemes:
Automotive Opportunities Fund and Energy Opportunities Fund.
WhiteOak Capital plans to launch a pharmaceutical and health care fund and Baroda BNP Paribas is looking to come out with a Nifty Bank ETF and Innovation Fund.
In addition, Groww MF has filed for a banking and financial services fund.
Thematic and sectoral is the only category in the active equity and hybrid space to allow multiple launches.
Also, the industry and the regulator are working to introduce a new category for investors looking for an intermediate investment product between MFs and portfolio management services.
New players lined up for entry
Last year marked the entry of several new players in the MF industry: from Bajaj Finserv and Zerodha to Helios Capital.
This year has already seen the entry of Old Bridge Capital Management.
Three MF applications are pending with Sebi — Angel One, Jio Financial, and Abira Securities. Angel One already has in-principle approval.
