The year 2024 saw the emergence of several mutual fund categories, both new and existing, that gained prominence for various reasons. These categories attracted significant attention from investors, as reflected in the substantial inflows into the schemes. However, not all of them made headlines for positive reasons. Some categories were discussed due to challenges and inconveniences they posed to mutual fund investors.This discussion is not about returns or performance but rather the unique reasons these mutual fund categories captured attention. Let us explore them in detail:

Defence funds

Defence funds came in headlines as the sector saw significant advancements and these developments highlight the government’s focus on modernization, indigenization and private sector involvement.

In the last three months, these funds have lost around 1%-2%. In the last six months, HDFC Defence Fund lost around 8.46%. An expert believes that this sector has been under pressure with many schemes showing subdued performance due to valuation concerns and global economic uncertainties.

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HDFC Defence Fund discontinued lumpsum and SIP investments in July due to valuation concerns as the fund’s portfolio had significant exposure to a limited number of defense-related stocks. The concentrated nature of the portfolio led to fears of overvaluation, which could pose risks to investors if stock prices failed to align with actual earnings growth,” said Sagar Shinde, VP Research, Fisdom.

Also Read | Top 5 small cap mutual funds which performed better than their benchmark in 3 yearsThe expert believes that the upcoming budget in February may offer a positive trigger for the sector and increased allocation to the sector may boost investor sentiment. “The upcoming budget in February may offer a positive trigger for the sector. Increased government allocation towards defense projects and infrastructure is expected, which could boost investor sentiment and improve fund performance. Nevertheless, other factors like global market conditions and geopolitical tensions will also play a significant role in shaping the outlook,” said Shinde.According to the expert, the outlook for the sector remains optimistic and investors should remain mindful of the market dynamics and valuation levels.

“The defense sector’s outlook remains optimistic, driven by modernization efforts and a strong emphasis on indigenization. Key policy measures, such as indigenization lists, defense corridors, and relaxed FDI norms, are fostering a robust domestic ecosystem. While the prospects are promising, investors should remain mindful of market dynamics and valuation levels,” said Shinde.

Midcap and smallcap funds

Mid cap and small cap funds were in the headlines due to the valuations and the froth which was created in these segments due to continuous inflows. According to an expert, when it comes to valuations mid cap and small cap have slightly placed at a modest froth compared to the large cap segment due to high earnings expectations for the second half of FY25. Overall, the data suggests no major froth in the equity markets currently, and valuations appear reasonable across the categories.

When the market regulator believed that there was froth building in the mid and small cap segments, the mutual fund houses were asked to frame a policy which contains appropriate and proactive measures to protect investors. In response to Sebi, mutual fund houses started declaring stress test results for these funds that will include the total time required to liquidate 50% and 25% of the portfolio.

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Commenting on the outlook for these funds, Chethan Shenoy, Director & Head – Product & Research, Anand Rathi Wealth Limited said that in H1FY25, corporate earnings were slightly slowed down due to the high base effect of the previous year, but we can expect an acceleration in earnings growth in the second half as driven by a favorable base effect and the Absence of some of the negative one-offs witnessed in the first half.

“For a full year FY25, we are expecting corporate earnings of mid & small-cap to grow at 20 and 22%, respectively. For CY2025, the mid & small-cap outlook is positive. However, we recommend that investors diversify across the market caps, such as large, mid, and small, at 55:20:25. This will help to get exposure across the market caps and reduce the concentration risk associated with any single market cap,” he further added.

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PSU funds

The PSU sector created the most buzz in 2024 due to its strong financial performance, increased government focus on infrastructure development and its pivotal role in different sectors.

“Investor interest was fueled by the sector’s attractive valuations, consistent dividend payouts, and robust earnings growth. Furthermore, PSUs gained from heightened government capital expenditure and their critical involvement in executing major policy initiatives. These factors, combined with operational efficiencies and their strategic importance in driving India’s growth agenda, made PSUs a key highlight in the market during the year,” said Shinde.

PSU funds have been the top performing category throughout the current calendar year driven by strong earnings growth, attractive valuations, and increased government focus on capital expenditure and infrastructure development.

The expert believes that these funds will continue to perform in a similar way as the market sentiments which played a significant role in 2024 will continue to influence these funds performance amid evolving economic conditions and policy changes.

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“The outlook of the PSU sector is highly optimistic supported by strategic government policies and sustained public investment. The sector continues to gain from a well-structured capital expenditure pipeline in critical areas such as defense, railways, and energy. Despite minor concerns over short-term spending trends, the visibility on long-term capital projects positions PSUs as a cornerstone for India’s economic and infrastructure advancement throughout the decade,” said Shinde.

Further, Shinde advised that investors should stagger their investments through SIPs (Systematic Investment Plans) or STPs (Systematic Transfer Plans) to capitalize on market opportunities while mitigating risks. Although the outlook remains positive, a balanced and disciplined approach is recommended to navigate potential valuation corrections and sector-specific challenges effectively.

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International funds

International funds came in headlines when China-based funds delivered significant returns in the recent months. Hang Seng and Nasdaq indices performed well in the current calendar year. After offering negative years for three consecutive calendar years, Hang Seng offered a 27.84% return in 2024.

“In recent months, China-based international funds have delivered significant returns, primarily driven by the broader market rally in the Chinese markets due to the announcement of the new stimulus package. Besides, FIIs temporarily shifted their focus from emerging markets to undervalued markets like China & America,” said Chethan Shenoy.

“We don’t recommend investing in any other global markets than India, as Indian markets are expected to grow at a healthy rate of 12 to 13% for the next 5 years and domestic equity mutual funds, on an average, expected deliver additional 2-3% alpha over Nifty 50 resulting in 13-15% return for the next forwarding years. If one wants to take global equity exposure in the portfolio, they can consider it only up to the 5% of overall portfolio,” he further recommended.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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