Year-End Special: ‘New investors should not get lured by high returns’

As part of our year-end series, ETMutualFunds is speaking to financial planners and mutual fund investors to find out their experience dealing with a trying year in 2022. The year 2022 saw some mutual fund categories offering stellar returns and many investors rushed to these schemes. The AUM of categories like sectoral and thematic funds has gone up considerably because of the same reason. Nidhi Manchanda, CFP, Fintoo, an online financial planning firm, says, “As per past data, the asset class which performs the best in one year will more likely not continue with the same performance in the next year.” Edited Interview.

What do you think about the investment space in 2022?

In 2022 so far, most key global indices such as S&P 500 declined by more than 26%. Recently it has shown an upward movement but still down by around 15% in 2022, escaping the bear market.

The other important Index to track globally is US Tech Index NASDAQ which is down by 26%, washing away most of the post pandemic gains. Rising interest rates and global economic factors are reasons for such a sharp downfall. It is trading more towards at 52 week low currently.

Compared to its global peers, the Indian equity market has clearly outperformed by a significant margin. Nifty 50 Index and Sensex are up by around 7.5% in the year 2022 so far amid global economic Gloom. Although 2022 began with equity indices showing sharp consolidation from their lifetime highs owing to the Omicron variant of COVID-19 and developments in Russia- Ukraine war. But, in the second half of the year, the Indian Economy showed resilience compared to global markets.

Having said that, it doesn’t mean that India has decoupled from the global markets. Indian Markets has a strong correlation with the US Markets, if not 100%.

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Talking about debt markets, rising interest rates has been the highlight of the year 2022. The US Federal Reserve had a hawkish view for most part of the year to get inflation under control and now turned Dovish. Most of the economies followed the same with India too hiking Repo rate by 190 bps this year starting in May 2022.

Debt market has bright prospects amid rising interest rates. The yield on the benchmark 10-year government bonds has increased by 101 bps to 7.34%. It is expected that Repo rate will be hiked till 6.5% as the central bank’s step towards bringing inflation under RBI’s tolerance band 2-6%. Bond markets valuations have recently improved.

Moving on to gold, we have witnessed the gold price increasing from $1,770 to $1,800 during 2021, marking 1.7% growth year-over-year. So far, this year Gold is flat and has bounced back around 8.6% from this year low of $1,676 hit in October. The World Bank predicts the price of gold to decrease to $1,700/oz in 2023 from an average of $1,775/oz in 2022. In 2024, the gold price is expected to decrease to $1,650/oz.

In the investment space, many Millennials and GenZ got lured by skyrocketing returns of Bitcoin around 345% in the year 2020. In 2021, it continued its upward trend and was up by 55%. However, since the beginning of 2022, Bitcoin is down by 60% so far. We can clearly see how volatile the unregulated crypto market is. Investors will now get more cautious after witnessing FTX collapse.

What are your thoughts on the hits and misses of 2022?

Indian equity market outperforming its global peers should be considered as a major hit this year. Looking at the broader markets, Sensex and Nifty is up by around 7.5% so far this year.

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Mid-caps are underperforming large caps this year, though the performance is positive for the year on YTD basis. Mid Cap index has moved up by 6.5% so far in 2022. However, Small Cap Index has underperformed this year showing a negative return of close to 11% YTD. Although there are few good quality small cap stocks which gave decent returns.

One of the sectors which has seen major outperformance in 2022 is PSU Banks which is up by around 62% this year. Other sectoral Indices like Auto, Bank, FMCG, Energy and Metals are up by 20% this year so far. Also, Defence related stocks have performed well in 2022.

Misses this year is the IT sector which is down by around 20% in line with a sharp fall in NASDAQ.

Investors having exposure in Cryptos would have experienced a big blow with fall steep fall in the crypto market.

What investors did right or wrong in 2022?

Retail Investors continued their SIPs and they did not panic in market volatility reacting to global factors and domestic rate hikes which is a right thing to do. Also, amid volatile equity markets, mutual fund investors have shown patience and continued to invest via SIP route to enter the equity market which is a wise move.

The number of SIP accounts have increased taking the total SIP account to 5.9 crores. Till October this year, SIP inflows have increased for the fourth consecutive month and crossed the Rs 13,000 crore mark for the very first time to touch Rs 13,041 crore. Mutual fund folios crossed an all time high of 13.90 crores. Also, retail MF folios saw a new high of 11.08 crores in October 2022.

What do you think was the biggest surprise in 2022? It could be an event or category that performed brilliantly or did badly in 2022.

As mentioned earlier, the biggest surprise in 2022 has been Indian Equity Markets outperforming global Markets.

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One of the sectors which has performed surprisingly well in 2022 is PSU Banks with sharp outperformance. Nifty PSU Bank Index is up by around 62% this year.

Advice to investors, especially new investors in the new year. And what are the mistakes they should avoid?

The degree of outperformance by the Indian equity markets is a rare scenario to experience and thus question arises on its sustainability and probability of Indian market to undergo significant correction.

Nifty now trades at a P/E of 22x FY23E and P/BV 3.1x, comfortably above the Long Period Average and offers limited upside in the near term. The Buffet indicator suggests that the markets are mostly overvalued. India’s Market Cap to GDP stands at 112% vs long period average of 79%.

It is suggested that investors avoid any lumpsum investment in the equity markets and should invest in a phased manner while getting exposure to equity. It is further suggested that investors should invest only in those asset classes which he/she understands and maintain a diversified asset allocation depending upon your risk profile and investment horizon.

For new investors, it is of utmost importance of not getting lured by high returns. As we see past data, the asset class which performs the best in one year will more likely do not continue with the same performance in the next year. So, diversifying is the key and do not try to chase high return asset class only.

Recommendations to read, watch, listen for investors.

Investors can read books to enhance the knowledge and what better than books by Warren Buffet and Peter Lynch to get your basics right and lay a strong foundation of understanding finance and stock market.


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