Omicron, rate hikes could make 2022 a tricky year for mutual funds

Mutual Funds (MFs) as an investment avenue won the confidence of investors in 2021 with the industry adding a staggering Rs7 lakh crore to their asset base during the year on the back of buoyant equity markets and a bunch of large new fund offerings (NFOs), but the new year could be tricky depending on the Omicron situation and possible interest rate hikes. While it may not be an easy money environment in 2022, some experts are hopeful that the impact of the Omicron variant of the novel coronavirus may not be as severe as those witnessed in the first two waves of the pandemic.

"To a large extent, the world has learnt to live with Covid and as such with the rapid vaccination coverage in India, the impact of Omicron on the economy should not be as devastating as the previous waves have been," said Suresh Soni, CEO of Baroda Mutual Fund.

Low interest rates, increasing awareness about mutual funds and good investment performance will be the contributing factors for rise in assets under management (AUM) going forward, he added. The AUM of the mutual fund industry grew by 24 per cent to an all-time high of Rs 38.45 lakh crore in 2021 by November-end itself, from Rs31 lakh crore at the end of December 2020, data available with the Association of Mutual Funds in India (Amfi) showed.

Vidya Bala, co-founder of Primeinvestor.in, believes that the final mutual fund AUM figure at December-end may settle a bit lower or flat with a consolidation round currently being underway.

There could be some outflows from debt funds on account of advance tax payments in December, said Himanshu Srivastava, Associate Director – Manager Research, Morningstar India. The 45-member mutual fund industry's AUM had seen a relatively lower growth rate of 17 per cent in 2020. Also, the year 2021 would mark the ninth consecutive yearly rise in the industry AUM after a drop for two preceding years. The investor count is estimated to have grown by a whopping 2.65 crore during the year. In 2020, a little over 72 lakh folios were added. While 2020 was a year marked with stock market corrections and high liquidity requirements of individuals and companies due to Covid-related uncertainties, experts believe that the negative impact of the pandemic was less in the year 2021 and inflows have shown a bounceback. Swapnil Bhaskar, Head of Strategy, Niyo (neo-banking fintech for millennials) said that the primary reason for impressive growth in the asset base is high liquidity in the market which was driven by a lenient monetary policy across the world and increasing participation from the retail investors at the domestic level. In addition, asset management companies (AMCs) launched more than 100 NFOs offering different investment ideas, which further led to the surge in the AUM, Quantum Mutual Fund CEO Jimmy Patel said.

The growth in the AUM has also benefited from mark-to-market because the industry has a meaningful portion of equity, said Radhika Gupta, MD and CEO at Edelweiss Asset Management. Mutual funds saw net inflows of Rs 1.93 lakh crore in 2021 (till November). This included Rs 71,600 crore into equity schemes and Rs 14,500 crore into debt schemes. As interest rates have been moderating, investors are looking at options beyond traditional avenues. Further, increased awareness about mutual funds has helped in boosting participation by retail investors in the mutual fund industry, Amfi President A Balasubramanian said.

Equity-oriented mutual fund schemes have seen a net inflow of Rs 71,600 crore in the year, marking a multi-fold jump from Rs 9,410 crore of the net inflow seen in 2020. Equity schemes have been witnessing consistent net inflows since March 2021. Before that, the category saw net outflows to the tune of Rs 46,791 crore for eight straight months from July 2020 to February 2021. Srivastava said that the correction in the market at the start of the second wave of the pandemic was the trigger for investors to make a comeback into equity-oriented mutual funds.

"Vaccination drives conducted across the nation and ease in lockdown restriction enabled the economy to rejuvenate and promote trade, leading to a bullish stock market. As the repo rate was slashed in May 2020 to a historic low and has remained unchanged since then, it has led investors to confide in equity instruments too," said Priti Rathi Gupta, Founder, LXME. Pleasingly, markets have continued their upward movement since March, thus boosting investor sentiment.

This also prompted investors to invest more rather than missing out on the opportunities. Further, rising equity markets and weak returns in traditional investment avenues like bank FDs (fixed deposits) and real estate are the other factors for investors getting attracted to equities, Quantum Mutual Fund's Patel said.