Mutual funds have become an increasingly popular investment option in India, particularly direct growth mutual funds (which have lower expense ratios than regular mutual funds as no intermediary/manager is involved).
In this edition of chart of the week, we examine the performance of equity mutual funds from three different angles. The first representation, a heatmap, shows yearly returns of the major mutual fund categories over the past six years. It indicates that equity mutual funds have been under pressure over the past two years due to rising inflation, repo rate hikes, and global conflicts resulting in muted returns.
Back in 2017, mutual funds posted strong returns, with all categories witnessing double-digit growth and small cap funds recording the highest return of 56.6%. However, in 2018, the performance of mutual funds largely declined – small cap funds fell the most by 16.9%, while multi & flexi cap funds had the highest returns of 5.4%. The Securities and Exchange Board of India (SEBI) changing its regulations regarding asset allocation for mutual fund houses in October 2017 also impacted returns in 2018. In 2021, the lifting Covid-19 lockdowns helped mutual funds post stellar returns, with small cap funds leading the way with 63.3% returns.
2022 is a different story. As we can see in the second chart, sectoral/thematic funds dominate the top-performing mutual funds over the past year. Kotak Infra & Econ Reform Dir Gr had the highest returns of 18.9% over the past year, while it rose 13.5% over the past five years. Also, the safe-haven asset, gold hitting all-time highs in India amid recession fears, helped mutual funds investing in gold post strong returns in the past year.
How has performance been over the long term? The third chart shows that Quant Small Cap Dir Gr has the highest five-year annualized returns of 23.9%, outperforming the small-cap funds category by 8.5 percentage points. Quant Tax Plan Dir Gr returned 22.2% over the past five years, enabling the fund to outperform its ELSS category by 12.1 percentage points over the same period
