As we enter 2019, the question on everyone’s mind is: can we say goodbye to market volatility that 2018 unleashed upon us? The answer may not be that simple.
By the end of 2018, while the Nifty50 gained a mere 3.5 percent over past one year, the mid-cap index and Nifty small-cap index lost 15.45 percent and 28.59 percent, respectively.
The divergence between the large-cap stocks and the rest of the stocks, made many investors turn risk-averse. Although investors continued with their systematic investment plans (SIP), the outcomes varied. Investors who stuck to large-cap funds managed to float with relatively lower return compared to previous year. Those investing in small and mid-cap funds burnt their fingers.
Are economic conditions turning around?
Global factors will influence the Indian stock markets in 2019. The fall in crude oil prices from a high of $85 per barrel to $53 per barrel is a big positive for the Indian economy. That keeps inflation in check as India imports most of its fuel. If, as a result, interest rates remain low, stock markets are expected to do well.
The risks are general election scheduled in mid-2019, currency wars seen globally and a resulting global slowdown. “Trade wars will continue but its impact on the market will recede over a period of time,” says Arun Gopalan, senior vice president, investment advisory and research, Systematix Shares and Stocks.
If, as a result, foreigners withdraw money from emerging markets, such as India, which are typically referred to as developing and high-risk markets, the Indian rupee and equity markets would be impacted, adds Gopalan.
What about interest rates? Are they expected to go down in 2019? The Reserve Bank of India (RBI) raised interest rates in early 2018 by 50 basis points, but in the last monetary policy opted to change its expectation of inflation.
The monetary policy committee of RBI cut its inflation forecast for September 2018 to April 2019 period to 2.7-3.2 percent from 3.9-4.5 percent earlier. It also estimated inflation for April 2019 to September 2019 between 3.8-4.2 percent from an earlier estimate of 4.8 percent for the period of April to June 2019.
Should you continue your SIPs?
Close to Rs 8,000 crore of inflows came into mutual funds through SIP in November. But volatility did not spare the mutual fund investors. Mid-cap funds as a category lost 12 percent whereas as small-cap funds lost 20 percent in the past year.
After good returns in CY17, the past year left investors in mid and small-cap funds in lurches. “The small and mid-sized companies should revive in CY19. The correction has led to many attractive investment opportunities in this space, especially small-cap stocks,” says Radhika Gupta, CEO of Edelweiss AMC.
Gupta, like many other fund officials, says last year’s market correction gave opportunities to many fund managers to buy stocks at attractive valuations.
A caution: Small and mid-cap funds come with high risk and one should invest in these schemes if one can stomach high volatility.
If you wish to avoid taking too much risk, you can allocate a bit more to large-cap funds. “Investors looking to invest in large-cap space in CY19 with a view to containing downside, should consider index funds given the low expenses,” says Gajendra Kothari, founder and managing director of Etica Wealth Management.
But with schemes now benchmarking their performances against total return index and tighter definition of large-cap stocks, it’ll get tougher for large-cap funds to outperform their benchmark indices. Apart from passive funds, investors should also consider ‘smart beta’ funds.
As markets are expected to continue to remain volatile, continue with your SIPs. Swarup Mohanty, CEO of Mirae Investment Management India says, “Investors need to remain invested in volatile periods. Ongoing SIP flows are a step in the right direction. However, investors must overcome the habit of investing in schemes that have done well in the recent past.”
Falling interest rates - an opportunity to seize?
Low interest rates offer an opportunity for those who seek some sort of a regular or fixed income. “Expectation of low inflation should ensure that the interest rates go down from here,” says Joydeep Sen, founder of wiseinvestor.in.
He advises investors to stay with short-term bond funds, as government securities (gilt) funds and long-term bond funds have already moved on the back of a sharp fall in the bond yields in recent past. If capital protection is important, opt for fixed maturity plans and traditional avenues such as fixed deposits and small saving schemes at current yields.
Will gold finally glitter?
Though the stock and bond investors have their own reasons to frown at their investments, the surprise in the pack was gold. Investors in gold benefitted in 2018.
Spot prices of gold prices moved up 8.5 percent over past one year on the back of rising global uncertainty, trade wars, rising oil prices and a weak US dollar.
Many investors, though, had stayed away from gold on the back of poor returns that it had offered in the past five years. According to the Association of Mutual Funds in India, gold ETFs saw a net outflow of Rs 280 crore since April 1, 2018.
Consumption of gold in India and China are also major drivers of gold. In India, since all the gold is imported, weak rupee accentuates gold prices. Given the expectations of an increase in geo-political tension in CY19, the gold prices are expected to remain firm.
Despite a temporary truce in trade wars, the threat of trade wars have not disappeared. Gold, as an asset class, does well in uncertain times.
Ritesh Patel, commodity analyst, IIFL expects COMEX gold to touch $1,450 per ounce, while for MCX gold, his target is around Rs 35,500 per 10 gram. Continue your asset allocation and ensure atleast around 5-10 percent of your portfolio is in gold.
Mutual funds to get cheaper
Mutual fund industry has seen many changes in the CY18. Regulatory landscape evolved further to make the products more investor friendly and transparent. SEBI introduced new norms on total expense ratio of funds.
In the new avatar, the equity funds can charge maximum 2.25 percent towards expenses whereas other schemes can charge up to 2 percent. SEBI also banned paying upfront commissions to distributors in any form.
KYC in 2019
It’s not just investments that you need to watch out in this year.
Your broker may get in touch with you to re-do your Know-Your-Client (KYC) process. In September 2018, the Supreme Court verdict on Aadhaar disallowed use of Aadhaar for completing ‘Know-your-client’ process for opening the online trading account.
This made the on-boarding process for clients cumbersome for most stock brokers as they have to go back to paper-based KYC which took at least two business days as compared to instant KYC using Aadhar. Though many intermediaries are working out less cumbersome ways to complete the process, there are improvements expected.
Some AMCs have opted for video KYC to accelerate the process, whereas some are working on various means to cut the time involved by using new technology. “In the first quarter of CY19, we may see some resolution of this issue by Ministry of Finance,” says Srikanth Meenakshi, co-founder and director, Fundsindia.com.
On December 3, SEBI extended the deadline for the transfer of securities in demat to April 1, 2019. Earlier the deadline set was December 5. Investors will have to dematerialise their securities if they intend to transfer their shares and securities.
However, a point to note that it is not compulsory to transfer one’s shares in demat form. One can hold on to this investments in physical form if one does not intend to sell it.