Mutual Funds Trends from the Past to Help You Navigate the Bear

Mutual Fund investing in a volatile market can be anxiety inducing for anyone. You could be someone who consistently keeps a close eye on all news and the market or you could be a passive investor. Either way, it’s not easy to get the jitters in case of any dips or lows in the market.

It is natural to instinctively want to pull away from investing, pause your SIPs or take other steps as the market sees a low. It is at such times that your patience as an investor gets truly tested and it gets important for you to keep calm through the chaos around you. In such periods of discomfort, what’s better than looking at history and understanding how have mutual funds performed in past bear markets?

In order to help you calm your nerves and feel more confident with your investing strategy, here is a list of five moments in mutual fund history when market volatility was scaring off investors but eventual market correction brought good returns and recovery.

1. The 2008 Global Financial Crisis:

The 2008 Global Financial Crisis was triggered by the collapse of the housing market in the USA which led to significant panic and massive outflows from Foreign Institutional Investors in India. During this time equity mutual funds has experienced a sharp decline in their NAVs (Net Asset Values).
However, despite the severity, the Indian Banking sector remained relatively stable. The government also stepped in to support using stimulus and with the addition of global recovery efforts, the marked did gradually regain confidence. This helped with loss recovery and an upward trajectory, leading to a strong rebound in fund performance.
In terms of numbers, Mutual Fund AUM decreased from ₹ 5,05,152 crore in March 2008 to ₹ 4,17,299 crore in March 2009 (a drop of about 17%) before recovering to ₹ 6,14,000 crore by March 2010 (an increase of about 47.14%). Mutual Fund Net Resource Mobilisation experienced a significant shift from an inflow of +₹ 1,53,801 crore in 2007-08 to an outflow of -₹ 87,739 crore in 2008-09, followed by a substantial return to an inflow of +₹ 83,080 crore in 2009-10.

2. The 2013 Taper Tantrum:

When the US Federal Reserve announced its intention to taper quantitative easing in 2013, it led to capital outflows from emerging markets, including India. This led to the Indian Rupee weakening, and a considerable correction in the stock market. This also had a negative impact on the Mutual Fund market, especially on those with debt exposure and stock sensitive to foreign investment.

By the end of March 2014, the total AUM of the Indian mutual fund industry had increased by 17.6 percent to ₹ 8,25,240 crore from ₹ 7,01,443 crore the previous year. While the overall AUM saw growth, equity schemes experienced net outflows of ₹ 9,269 crore in the financial year 2013-14. The Reserve Bank of India (RBI) then took measures to stabilize the rupee and the economy. As the initial panic subsided and there was more clarity regarding the tapering, the Indian markets and mutual funds also gradually recovered, with the total AUM further increasing to ₹ 10,82,757 crore by March 31, 2015, and equity schemes witnessing a significant net inflow of ₹ 71,030 crore in the financial year 2014-15. Other macroeconomic factors also aided this recovery.

3. Demonetization in India in 2016
On November 18, 2016, the Indian government made a sudden decision to demonetize currency notes of Rs.500 and Rs.1000. This created a temporary disruption in economic activity as well as market sentiment. The SENSEX fell sharply as investors worried about the impact on corporate earnings, especially in cash-dependent sectors. Mutual funds with significant exposure to these sectors experienced a decline in NAVs.

Despite the initial market disruption from demonetisation, the mutual fund industry experienced significant growth due to a surge in bank deposits leading to lower interest rates, making mutual funds more appealing. Increased retail investor participation, driven by reduced cash dominance and greater financial awareness, also contributed to higher inflows. Government and regulatory efforts promoting financial inclusion further channelled savings into mutual funds as the economy adapted. Net investment flows surged to over ₹ 3.4 trillion, propelling the total AUM to an all-time high of over ₹ 17.5 trillion by the end of FY 2016-17. Equity-oriented mutual funds, which had experienced net outflows in 2013-14, saw consistent positive net inflows exceeding ₹ 700 billion in each of the three subsequent financial years, totalling over ₹ 2.25 trillion.

4. The 2018 Crisis
An NBFC established in 1987 was a major player in financing, developing, and managing infrastructure projects in India. Its shareholders included prominent national banking institutions, and foreign entities from Japan and Abu Dhabi. In June 2018, the company faced defaults on commercial paper and loan repayments.

This triggered a loss of confidence in the company and the wider non-banking financial sector. Debt mutual funds with exposure to the company and similar entities faced significant markdowns, leading to a drop in their NAVs. Equity markets also felt the contagion. The RBI and the government intervened to ease liquidity concerns and restore confidence in the financial system. While the recovery in debt markets was gradual, equity markets also rebounded over time as the systemic risks were contained.

Building upon a decade of strong expansion, where the Indian mutual fund industry's AUM surged from ₹ 6.14 lakh crore in March 2010 to ₹ 23.8 lakh crore by March 2019, the market experienced a period of recalibration following the situation. This phase, while showing a temporary dip in overall AUM to ₹ 22.2 lakh crore by March 2020, also presented potential opportunities for retail investors as the industry adapted and stabilised. Importantly, even during this period of adjustment, investors continued to entrust their savings with mutual funds, resulting in a net inflow of ₹ 87,301 crore in 2019-20, demonstrating their sustained confidence in the long-term growth prospects of the Indian mutual fund market.

5. The 2020 COVID-19 Pandemic Crash:
The lockdowns of March 2020 due to the COVID-19 pandemic led to a massive global sell off. The Indian stock market reacted violently, witnessing its steepest single day decline as investors grappled with extreme uncertainty surrounding the virus's impact on the economy and corporate earnings. Consequently, mutual funds, particularly those heavily invested in equities, suffered significant value erosion as the underlying stock prices plummeted. Surprisingly, the recovery post the COVID crash was swift and strong. Supported by liquidity infusion, digital adoption, and eventual earnings recovery, the markets staged a remarkable rally.

The Indian mutual fund industry experienced growth, with its AUM surging by 41.2% to ₹ 31.4 lakh crore. This expansion was primarily driven by significant increases in the asset base of both open-ended equity-oriented schemes (by ₹ 4 lakh crore) and debt-oriented schemes (by ₹ 3 lakh crore). Interestingly, while private sector mutual funds saw a net inflow of ₹ 1,42,378 crore, public sector mutual funds also recorded a positive net inflow of ₹ 72,365 crore during the same period, indicating broad-based investor confidence across the industry.

The Indian mutual fund industry experienced significant growth in investor participation and AUM during and after the initial COVID-19 lockdowns. Increased awareness and easier access through digital platforms attracted a wider range of investors, including a new generation. Systematic Investment Plans (SIPs) also gained traction, reflecting a growing investment discipline among Indian investors.

As you can see, while the volatility in the markets was high due to certain economic disruptions, the markets tend to make a recovery sooner or later. While these market movements impact mutual funds as well, staying invested and having a long term perspective can help investors navigate the bear markets more effectively and potentially benefit from the rebounds.

Disclaimers:

Source: All numbers and data taken from SEBI Annual Reports of the respective FY.

Past performance may or may not be sustained in the future.
This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates, shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as a research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable. While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

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