Mutual funds want investors to temper expectations

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After delivering decent returns in last two years, mutual funds want investors to temper their expectations this year given the overall economic challenges.

Though last year was almost filled with optimism, Axis Asset Management has tempered its expectations. “We expect growth to remain moderate, given the fiscal consolidation and slower credit growth. Many segments of the economy are showing signs of a slowdown given the higher base and this has translated into weaker corporate earnings,” it said in a note.

The fund house believe factors such as margin improvement may not continue for long, however, continuation of prudent capital allocation policy by government to boost both capex and consumption, may drive earnings recovery.

Fast-growing economy

The strength of the US dollar coupled with stimulus measures in China have led to foreign fund outflows. However, these have been counterbalanced by the robust domestic fund inflows. Nonetheless, India remains one of the fastest-growing economies globally. The tariffs on China and other countries proposed by US President-elect could significantly impact global trade. However, during his first term, the tariffs on China benefited India, and this time, India might again be able to turn these trade restrictions into an opportunity.

It is pertinent to note that the new year has begun after the strong rallies in last two years and elevated valuations thereof. Key events have caused volatility and rallies in equities. While the economy has been on a strong footing so far, equities are off the all-time highs and have seen a correction in the last three months, it said.

With the valuation still remaining high, right stock picking across market caps will be key in this year, said Axis AMC.

Echoing a similar sentiment, Mirae Asset said earnings growth may be a key driver of returns in 2025. Given that valuations are trading at a premium and there is froth in certain segments of the market, bottom up stock selection will be important, it said.

While equities have delivered better returns, Mirae Asset recommends investors not to extrapolate last three year returns and align their return expectations accordingly.

Hybrid funds, given their flexibility in asset allocation, can also be made part of the core portfolio. In thematic funds, one may consider Consumption Fund for expected consumption recovery and Banking & Financial Services Fund given the decent risk-reward, it said.