Movers & Shakers of 2022

The Indian stock markets outperformed most global markets in 2022, making investors richer in terms of market capitalisation by more than Rs 16.36 lakh crore. Despite geopolitical uncertainties, high global inflation and consistent selling by foreign investors in India, domestic flows remained resilient, thus helping the benchmark indices hit new all-time highs in 2022.

Meanwhile, the global equity markets witnessed a sharp recovery in October and November last year as slightly dovish comments by the US Federal Reserve and the prospects of China reopening dominated the headlines. The global markets outperformed the Indian markets in this recovery after many quarters. The Indian headline benchmark indices crossed the previous all-time high levels. 

This saw the markets making new highs multiple times in November 2022. The regaining of all-time high levels was least expected a few months back when economic news flows ranging from the Federal Reserve rate hike to China slowdown to geopolitical tensions to elevated crude oil prices were pointing towards a cautious approach for equities, in general. The markets, however, witnessed higher volatility in December 2022 near their all-time high levels amid some profit booking. The global economy continued to slow down with many indicators pointing at slowing or negative growth momentum. While the US’ GDP growth for Q3CY22 came in better-thanexpected, high frequency indicators deteriorated with emerging weakness in the housing sector.

This was also on account of the PMI index entering the contraction zone of less than 50. However, the US’ labour market continued to remain tight with non-farm payrolls, job openings and wage growth continuing to surprise on the positive side. The growth of Europe and China also continued to remain so. Brent crude oil prices took a dip due to weak demand outlook and easing of Venezuela’s sanctions. Most other industrial metal prices rose on the back of announcement of easing of corona virus-related restrictions and real estate supportive measures in China. Gold prices also rose as US’ yields eased on hopes of a deceleration in the pace of rate hikes by the US Federal Reserve. 

 Mutual Fund Industry in 2022
Mutual funds too witnessed quite a few changes not just in terms of growth but also in regulatory and business terms. The assets under management (AUM) of the mutual fund industry crossed Rs 40 lakh crore for the first time ever and rose to all-time high levels in November 2022 to Rs 40.4 lakh crore from Rs 39.5 lakh crore in October 2022. The rise in AUM was predominantly due to mark-to-market gains in equity-oriented funds. The AUM of equity-oriented funds by the end of November 2022 was at Rs 15.6 lakh crore compared to Rs 15.2 lakh crore in October 2022. Inflows during November 2022 fell sharply to Rs 2,250 crore from Rs 9,390 crore in October 2022. Former new fund offers and the industry witnessed outflows for the first time since February 2021.

Outflows in November were at Rs 168 crore as against inflows of Rs 6,340 crore in October. The overall inflows have been lower in the last four months ever since the markets recovered since July 2022. New fund offers (NFOs) in October and September were at Rs 2,426 crore and Rs 3,050 crore, respectively. The systematic investment plan (SIP) inflows continued to rise and came in at Rs 13,307 crore in November compared to Rs 13,040 crore in October. Flows in dynamic asset allocation and balanced advantage funds came in sharply lower in November at negative Rs 1,600 crore. Higher number of NFOs in debt index funds’ category led to higher inflows at Rs 8,600 crore in the category during November. 

Mutual Funds Performance in 2022
After witnessing a sharp recovery in October and November 2022, the markets turned volatile in December with mild profit booking visible near the all-time high levels. After the sharp fall in September, equity markets across the globe staged a comeback rally with the US’ markets leading the recovery as investors took in stride the US’ Federal Reserve rate hike concerns.

Overall, while Large-Caps recovered sharply from the September lows and outperformed, Mid-Cap and Small-Cap funds started outperforming in October but the month of December was not so encouraging for the equity markets. If overall the markets do not witness a significant correction, mid-cap and small-cap funds may continue to outperform. Banking funds continued to outperform as investors expect improved business performance to continue after most banks delivered superior performance in their recent Quarterly Results, showcasing improved loan growth and asset quality. Banking funds significantly outperformed in CY22, returning around 15 per cent. 

This was in comparison to 2 per cent return delivered by large-cap funds on an average. Pharma funds, after a brief period of outperformance in September, continued to underperform. Value and contra funds made a comeback in 2022, particularly post last year’s highs in October 2021. The category average return for the year 2022 was at around 5 per cent. The variation in returns of funds within the focused category remained significantly high with the return of the worst fund in 2022 at negative 14.5 per cent while the best fund delivered return of 18.3 per cent. In general, this category is extremely volatile and only aggressive investors should take exposure to this category. 

Movers and Shakers of 2022
In this section, we will analyse the top and the bottom performing equity funds. We would only be covering open-ended equity mutual funds. The sub-categories covered include large-caps, large & mid-caps, mid-caps, small-caps, flexi-caps, sectoral and thematic funds. All data is as on January 3, 2023.

Overall, PSU, banking, financial services and infrastructure funds were the best performers while the darlings of 2020 and 2021, namely, international and technology funds, were the worst performers. The sell-off in technology sector amid higher valuations has led to such a poor performance. 

Here we can see that the funds following value and blend investment styles have made to the top while the performance of the most growth-oriented investment styles has been shaky in 2022. That said, out of 30 large-cap funds, only four of them outperformed the benchmark index. This clearly shows the importance of fund selection. Moreover, for large-cap exposure, index funds seem to be the better option. 

In the large & mid-cap funds space, Quant Large and Mid-Cap Fund continued to outperform the category. However, ICICI Prudential Large and Mid-Cap Fund performed well as it generated good returns with lower risk. Only 10 out of 27 funds generated negative returns with only two funds falling over 5 per cent. Therefore, as a category, it performed quite well. However, when it comes to beating the benchmark, only seven funds were able to beat the benchmark index. This again emphasises the importance of fund selection. 

Again, Quant Mid-Cap Fund was able to maintain its top position in the year 2022. However, even HDFC Mid-Cap Opportunities Fund has made its way to the top after underperforming for quite a bit of time. Surprisingly, Taurus Discovery (Mid-Cap) Fund too made to the top which otherwise was underperforming from the past three years. On the contrary, the top performers such as Axis Mid-Cap Fund and DSP Mid-Cap Fund were some of the bottom performers in 2022. 

This shows that winners rotate and hence having proper asset allocation and a fund selection strategy is essential. 

 The story continues for small-caps as well as Quant Small-Cap Fund made it to the top in 2022 as well. SBI Small-Cap Fund and Nippon India Small-Cap Fund are some of the most consistent funds among the list. Out of 24 small-cap funds, almost 15 funds have outperformed the benchmark indices of which only four funds were able to beat inflation in 2022. Moreover, only 11 funds have generated negative returns. 

HDFC Flexi-Cap Fund has made it to the top of the list in 2022. In fact, this fund has done well on a risk-reward basis as well. However, in the flexi-cap category the variance of returns is quite high with the best fund delivering 18.29 per cent while the worst fund delivered negative 13.42 per cent in 2022. However, the biggest surprise was the Parag Parikh Flexi-Cap Fund that made it to the list of bottom performers. This was largely due to being overweight on domestic as well as US technology companies that largely underperformed in 2022. 

Sectoral funds were the charm of the year 2022 with funds dedicated to infrastructure and banking and financial services turning out to be outperformers. On the contrary, the worst hit among the sectoral funds was technology that largely underperformed in 2022 followed by healthcare. Interestingly, these were the darlings of the year 2020 and 2021.

Public sector undertaking (PSU) was the theme of 2022, which was largely driven by the PSU banks clocking lower gross nonperforming assets (GNPA) and net non-performing assets (NPA) prints. Environmental, social and governance (ESG) as a theme has never been the top performer. And though in 2020 and 2021 it was successful in achieving double-digit returns, in 2022 it was one of the worst performing themes as it was overweight on sectors like technology, healthcare and consumer discretionary that witnessed a lacklustre performance.

Conclusion — Although mutual funds were the net buyers in the year 2022, there were top as well as bottom performers. This article showcases mutual funds that were the movers and shakers in 2022. Our analysis also shows the importance of mutual funds research before investing. Moreover, having proper asset allocation too is important as it helps you in diversifying your risk across asset classes as well on a sub-asset class level.