IIFL Mutual Funds Report - FY18 - India Infoline

April 2017

Table of Content

Review of Indian Market ? FY17 Outlook FY18 Snapshot of Mutual Funds Industry Category-wise Return of Mutual Funds Top Recommended Mutual Funds Recommended Mutual Funds ? Category-wise

Page No.

3 4 5 6 7-12 13-14

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Review of Indian Market ? FY17

Fiscal year 2017 was a cherishing year for investors as the market reached an all time high in March 2017, backed by robust FII and DII flows. FII poured net Rs 50,206 crore into Indian equity market in FY17 compared to net outflow of Rs 17,579 crore in FY16. And domestic mutual funds pumped Rs 54,735 crore in the equity market, making them a significant contributor in the market besides FII.

The Nifty 50 gained ~18.5% in FY17 against a decline of ~8.9% in FY16. Nifty Metal was the top gainer in the sector indices as the metal prices recovered in FY17 followed by Nifty PSU Banks and Nifty Commodity. Nifty IT and Nifty Pharma were the only indices in FY17 which ended in red because of US President Donald Trump's stance on outsourcing of jobs.

During the fiscal year 2017, many unexpected events happened like Brexit outcome, Trump's victory and demonetization, which stunned the financial market. FY18 will be a significant year as Theresa May, the PM of UK, will trigger the Article 50 that will start the process of leaving the EU by April 2019. Trump's emphasis on infrastructure spending, optimizing corporate tax and cutting personal tax rates has brought hopes that US economy will grow at a higher pace. However, whether he will be able fulfill his promises will be seen in FY18 as he was not able to repeal and replace Obamacare.

On the night of November 08, 2016 the nation was caught unaware by the unprecedented decision of the Narendra Modi government to demonetize Rs 500 and Rs 1,000 notes. It was a very significant decision as close to 86% of the money circulating in the economy was in the denomination of Rs 500 and Rs 1000 notes. The decision hit the Real Estate, Cement, Automobiles and Consumer Goods while it bring cheers to Banks as it improved their CASA. However, demonetization did not drag down the economy as it was argument by some scholars.

Net Flows in Equity Market

NIFTY 50

120000 100000

80000 60000 40000 20000

0 -20000 -40000

108673 40714

63889 -17579

50206 54735

9300 9100 8900 8700 8500 8300 8100 7900 7700 7500

FY15 FIIs Net Flows in equity (Rs cr)

FY16

FY17

Domestic MFs Net Flows in Equity (Rs cr)

*figures and returns as on March 31, 2017.

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Note: Net FII flows as on March 30, 2017 and net MF flows as on March 30, 2017.

Outlook ? FY18

The outlook for FY18 is positive considering strong macroeconomic indicators and the implementation of GST. However, there are some reports that India may receive below normal monsoon in 2017.

? Implementation of GST: GST is all set to be implemented from July 1, 2017 and will replace the current cumbersome taxation system in India. As per some estimates, the GDP will rise by 2% after the implementation of GST. With the implementation of GST, unorganized sector will come under the tax net and will lose the benefit of non-tax payments. Thus, the companies in the sector with a high market share of unorganized players will gain more market share. In addition, sectors such as pharma, FMCG, consumer durables etc., which have a long supply chain spread across multiple states, will be able to save on the transportation cost. However, with the implementation of GST, service tax is expected to go up from 14.5% which will impact hospitality, airlines, telecom and insurance in the short-term.

? Below Normal Monsoon and fear of El Nino: According to Skymet, India is expected to receive below normal monsoon in 2017 because of strengthening of El Nino in Pacific Ocean which has brought the fear of possible drought. India received normal monsoon in 2016 which revived the rural economy after two consecutive droughts in 2014 and 2015. But historic data shows that occurrence of 3 drought in 4 years and the occurrence of El Nino within 2 years after a strong La Nina is very unlikely. In addition, monsoon in India also depends upon Indian Ocean Dipole(IOD) which is positive and is expected to neutralize the impact of El Nino in India.

? Modi to speedup the reforms: The Modi government will increase the pace of reforms after BJP's spectacular performance in the latest five state elections with a behemoth victory in UP has boosting its confidence. The presence of BJP will rise in the Upper House which will support the government in passing bills. With the UP victory, PM Narendra Modi has also strengthen his chance to win the 2019 election.

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Snapshot of Mutual Fund Industry

The total AUM of mutual fund industry stood at ~Rs 18.8 lakh AUM (Type-wise)

crore in Feb 2017 as compared to ~Rs 13 lakh crore in Feb

Type (Rs thousand cr)

2016.

Hybrid Funds

Balanced funds have also seen impressive growth of 74% as Debt Funds investors are getting aware of its tax benefits and moderate

risks. Ultra short term funds and Income funds have seen Equity Funds

splendid growth in their AUMs in the last 1 year.

Commodity Funds

Feb-17 209 1,119 543 8

Feb-16 132 813 342 8

Change (yoy) 58%

38%

59%

3%

Equity mutual funds have given enormous returns in the last 1 Total

1,879

1,295

year, owing to the bounce back of equity markets in March Source: Ace MF

2017 driven by extensive FIIs' buying in the month. On an average, equity mutual funds have given returns of ~29% in the AUM (Category-wise)

past 1 year. Whereas, balanced funds have given a return of ~20% in the last 1 year.

Category (Rs thousand cr)

Feb-17 Feb-16

45%

Change (yoy)

Gilt fund and long-term debt funds have given an average Income

388

260

49%

return of ~11% in the last 1 year because of their high modified duration. But going forward, the high duration funds may not

Diversified

369

245

50%

be able to give high returns as the RBI has changed its policy Liquid

350

279

26%

stance to neutral from accommodative and the bonds yield

have also declined significantly. There is a high probability that Ultra Short Term Plan

206

129

59%

RBI will not cut the policy rates in 2017.

Balanced Funds

139

80

74%

According to AMFI, mutual fund houses has added 67 lakh Fixed Maturity Plans

111

92

20%

investor accounts in first 11 months of FY17 to total 5.4 crore

accounts which is already higher than the total account ELSS

60

38

56%

addition in FY16 i.e. 59 lakh accounts. In addition, the average

Source: Ace MF

SIP size was ~Rs 3,100 per month per SIP account.

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