Mutual funds had a dream run both in terms of record inflow and delivering returns to investors. However, valuations in equity markets running much ahead of any meaningful recovery in corporate earnings and pitfall in economic recovery remain major concerns, going ahead. Kalpen Parekh, President, DSP BlackRock Mutual Fund, shares his thoughts on the market’s prospects. Excerpts:

Do you expect inflows into mutual funds to increase next year?

Yes. I think inflows will continue as they are part of structural changes. However, the quantum of inflow can fluctuate depending on how stable or volatile rates and stock prices are.

What kind of returns can investors expect from equity and fixed income mutual funds next year?

Returns for such short-term horizons in equities are unpredictable. So, I won’t hazard a guess. Fixed income returns are normally closer to prevailing bond yields.

Do you expect the bull run in equity markets to continue next year?

Equity markets need support of earnings, valuations and flows. At this juncture, earnings will improve, flows will range between stable and rising, valuations are higher than past averages. So, two out of three drivers are positive. My disclaimer here would be valuations are priced to perfection; so any break in our macro stability or global factors can create volatility and investors should budget for this if it were to happen by having some dry powder in hand.

Which are the developments that can upset India’s economic growth prospects?

Any spike in oil and commodity prices globally, rise in inflation and interest rates in India and globally can impact our macro-economic stability adversely.

What kind of schemes should mutual fund investors look at next year?

It depends on each investor’s time horizon and appetite for fluctuations. At such moments when markets are pricing in all good news, the only variables the investor can control is asset allocation and time horizon. Timing matters but it is almost impossible to predict an opportune time for investing. Hence, equity investors should have a minimum five-year horizon.

SIP investors should continue with diversified equity funds, and continue till the fixed time-frame. Investors who want no fluctuations should stick to short-term bond funds and benefit from rising interest rates. Cautious long-term investors should prefer asset allocation funds, such as dynamic equity funds and balanced funds.

I want to reiterate, mutual funds are not restricted to equity, we have options for replacements of savings accounts all the way to international funds.

Hence, the investor must choose keeping his time horizon in mind. Given an option between high returns over a short period of time and moderate return across 10-20 years, I would encourage the second option to investors.

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