2022 in Review: Banking funds lead among equity MFs with 30% returns; check top performers

Market volatility during 2022 impacted the performance of mutual funds across the board. However, some sectoral and thematic funds outperformed, giving better returns to their investors than others.

In a 2022 mutual fund review report, brokerage house ICICI Direct informed that banking funds led equity mutual funds this year. They remain outperformers as investors expect improved business performance to continue on the back of loan growth and asset quality, it said.

Banking funds significantly outperformed in CY22 with one-year return at around 30 percent compared to a 20 percent return delivered by large-cap funds, the report pointed out. Among banking funds, PSU funds were the top performers.

This was followed by infra funds with one-year returns of over 25 percent.

"Value/Contra funds made a comeback in 2022 particularly post last year’s highs in October 2021. The category average return for the last one year was at around 23 percent," said the brokerage.

The variation in returns of funds within the focused category remains significantly high with the one-year return of the worst fund at -10 percent and the one-year return of the best fund at 26 percent, informed ICICI Direct. In general, this category is extremely volatile and only aggressive investors should take exposure to this category, it cautioned.

Also, it noted that pharma funds, after a brief period of outperformance in September, continued to underperform.

Overall, the brokerage highlighted that while large caps recovered sharply from the September lows and outperformed, midcap and small-cap funds started outperforming in the last one month. If overall markets do not witness a significant correction, it expects midcap/small cap funds to continue to outperform.

Global funds have also outperformed in the last three months after having underperformed significantly for many months, noted the brokerage, adding that technology stocks led the recovery in US markets as a sharp fall induced bargain buying by investors.

"Volatility, in general, is likely to be higher over the next few months. The higher volatility will continue to lead to a sharper rotation of performance within sectors and market segments. Investors should be extremely careful while investing in sector funds," advised the brokerage.

Markets and inflows

After witnessing a sharp recovery in October and November 2022, markets turned volatile in December with mild profit-booking visible near all-time high levels. In December, Nifty lost around 3 percent while for the year, it is up around 4 percent.

Inflows into equity funds also declined sharply in the last six months, noted ICICI Direct. From the highs of ₹18,500 crore in May 2022, inflows have declined consistently as investors turned cautious as markets again scale all-time high levels, it said.

However, when markets trended lower in September, inflows were higher. Retail investors have consistently shown investment maturity over the last few years where inflows have been higher at lower levels and lower at higher market levels, pointed out the brokerage.

History

Just before the Covid-19 pandemic-induced fall in February 2020, inflows were lower at an average of ₹4,500 crore per month as markets had rallied around 11 percent from lows of 11,000 on the Nifty 50 index level in August 2019 to 12,200 levels in January 2020, the report mentioned.

It further highlighted that markets continued to rally post the Covid-induced fall in 2020 as investors turned net sellers (outflows of ₹5850 crore per month from July 2020 to February 2021). Currently, in the last three months from August 2022 to October 2022, as markets have moved up and are trading near all-time high levels, inflows have reduced to an average of ₹5900 crore per month from ₹15,500 crore (average from November 2021 to June 2022), it added.

AUM

The assets under management (AUM) of the mutual fund industry crossed ₹40 lakh crore for the first time ever, rising to all-time high levels in November 2022 to ₹40.4 lakh crore from ₹39.5 lakh crore in October 2022, informed the brokerage. The rise in AUM was predominantly due to mark-to-market gains in equity-oriented funds.

The AUM of equity-oriented funds by the end of November 2022 was at ₹15.6 lakh crore compared to ₹15.2 lakh crore in October 2022, it said. It further informed that the inflows during November 2022 fell sharply to ₹2,250 crore from ₹9,390 crore in October 2022.

"Ex-NFOs, the industry witnessed outflows for the first time since February 2021. Outflows in November were at ₹168 crore vs inflows of ₹6,340 crore in October. Overall inflows have been lower in the last four months, ever since the markets recovered in July 2022. NFOs in October and September were at ₹2,426 crore and ₹3050 crore, respectively. SIP inflows continue to rise and came in at ₹13,307 crore in November compared to ₹13,040 crore in October 2022," the report stated.

Strategy

While investors still need to be cautious while investing in duration funds as absolute levels on dated papers are still far lower than the historical average, medium-term papers (three to five years) offer a good investment opportunity. Investors may start allocating their long-term debt allocation into short-term/medium-term debt funds, advised the brokerage.