Equity, Debt, and Gold – Performance Review and Investment Outlook for 2025

It is interesting to note that all three aforementioned asset classes registered positive growth. The Indian economy displayed strength and resilience, driven by a revival in rural consumption, a pickup investment, and strong services exports. However, global uncertainties and sticky food price inflation played a spoilsport, resulting in high volatility. Accordingly, equities experienced a slowdown in performance compared to 2023. Instead, investors flocked to safe havens such as gold which outperformed all other asset classes. Debt instruments continued to offer stability and a cushion against market volatility.

Let's look at the performance and the outlook of equity, debt, and gold in detail:

Equity

The Indian equity market scaled multiple fresh highs in 2024 and hit a peak in September backed by resilient GDP growth, healthy corporate earnings, continuity at the central government, and growing participation among retail investors. However, the market witnessed correction from October onwards due to intense selloff by FIIs amid concerns over stretched valuation and a stronger dollar index after Donald Trump's victory in the US Presidential elections. Domestic institutional investors, particularly mutual funds, provided critical support amid the FII selloff, which restricted the losses in the equity market.

Mutual Funds pumped in a record net amount of Rs 4.2 trillion, as of December 30, 2024. On the other hand, FIIs pumped in barely Rs 2,026 crore in CY24, after a record net investment of Rs 1.71 trillion in CY23, according to date from ACE MF.

Despite correction towards the end of the year, the Sensex ended on a positive note and delivered modest gains of 8.3% in CY 2024 as of December 30, 2024, compared to 18.7% in CY 2023. In comparison the BSE Midcap and BSE Smallcap continued to outperform, recording stellar returns of 25.9% and 28.4%. In CY 2023, the Midcap index had skyrocketed by 45.5% and the Smallcap index by 47.5%.

Among sectors, Realty, Pharma, Infotech, Auto, and Infrastructure were among the top performers, while FMCG and Private Banks underperformed.

How did Equity mutual funds fare in 2024?

With the broader market continuing its extraordinary growth in the current calendar year, Small Cap Funds and Mid Cap Funds were the top-performing equity mutual fund category of 2024. Multi Cap Funds, Large & Mid Cap Funds, Value Funds, Flexi Cap Funds, and Focused Funds due to their higher allocation to mid and small-cap stocks too delivered strong growth. Meanwhile, Large Cap Funds fared reasonably, generating double-digit growth on an average.

That said, performance within these categories varied greatly, emphasising the need for careful selection of schemes. For instance, the top performing Small Cap Fund offered returns of 47.9% during the year, while the bottom performer gave much lower returns of 16%.

The outlook for Equity mutual funds in 2025

Going ahead, market experts are positive about the Indian equity market's bullish trajectory in 2025, supported by robust fundamentals of the corporate sector and the resilient growth of the domestic economy. However, a potential slowdown in global growth, geopolitical tensions, an uncertain inflation outlook, and weak consumption growth can temper the growth prospects.

As per RBI's latest report, despite the recent correction, equity valuations remain elevated across metrics, such as trailing and forward price-to-earnings (P/E) ratios, market capitalisation-to-GDP and earnings yield. Stretched valuations are more prominent in midcap and smallcap stocks. To justify the current valuations for all indices, the required earnings growth should exceed the expected earnings growth to forestall a large and abrupt market correction.

The S&P BSE Smallcap to Sensex ratio, which is a key determinant of valuations in the small-cap segment, currently stands at a peak of 0.7, indicating a high premium and low margin of safety. It is worth noting that the ratio was at around 0.6 level just before the mid and small-cap crash of 2018-19. If the tables turn large caps could potentially outpace small caps in 2025.

Thus, investors need to be cautiously optimistic when approaching equities. Investors should avoid getting carried away by the exuberance seen in recent years as past performance is not an indicator of future. In case the market witnesses a correction in the near term, the downside could be higher in the case of mid and small-cap stocks as the valuation in the segment appears to be overstretched. Meanwhile, large caps can provide better stability and downside protection. Also, don't live under the impression that earnings would improve linearly quarter-on-quarter. The equity market cannot continue to scale new highs on irrational expectations and exuberance, particularly when there are ostensible clouds of global economic uncertainty and geopolitical tensions.

Investors should diversify their portfolio keeping the risk-reward ratio in mind. Carefully select equity mutual funds that align with your investment objectives, risk profile, and investment horizon to mitigate the impact of potential market volatility and corrections.

Debt

The year 2024 was full of positive developments for the Indian bond market. Indian government bonds were included in a few global bond indices such as JP Morgan Global Bond index, resulting in higher inflows from foreign investors. Moreover, rating agency S&P upgraded India's credit rating outlook from 'stable' to 'positive'. India's 10-year government bonds traded in the range of 6.7% to 7.2% in CY 2024.

While several emerging economies struggled due to high inflation and low foreign exchange reserves, the Indian debt market maintained stability driven by a lower fiscal deficit and a comfortable debt-to-GDP ratio. The Indian rupee, despite plunging for the seventh straight year, has outperformed emerging market peers. This has led to increased flows into Indian debt markets.

Data from ACE MF shows that FIIs invested heavily in Indian bonds with inflows to the tune of Rs 1.5 trillion during the year, more than double compared to the previous year.

How did Debt mutual funds perform in 2024?

Debt mutual funds registered one of the best performances in recent years, with several schemes generating high single-digit returns. Funds carrying medium to long-term maturity such as Gilt Funds, Medium Duration Funds, Banking & PSU Debt Funds, and Corporate Bond Funds, were among the top performing categories with average returns of over 9%.

Funds with shorter maturity such as Short Duration Funds, Ultra Short Duration Funds, and Liquid Funds also delivered robust returns, marginally higher than the returns generated in CY 2023.

Outlook for Debt Mutual Funds in 2025

The Indian bond market has shown resilience due to a stable macroeconomic environment. The Monetary Policy Committee (MPC) of RBI noted that the near-term inflation and growth outcomes in India have turned somewhat adverse since the October policy. Going forward, however, economic activity is set to improve along with rising business and consumer sentiments, as reflected in the Reserve Bank's surveys.

It added that the recent spike in inflation highlights the continuing risks of multiple and overlapping shocks to the inflation outlook and expectations. Heightened geo-political uncertainties and financial market volatility add further upside risks to inflation. High inflation reduces the purchasing power of both rural and urban consumers and may adversely impact private consumption. The MPC emphasises that strong foundations for high growth can be secured only with durable price stability.

Thus, the MPC remains committed to restoring the balance between inflation and growth in the overall interest of the economy. Accordingly, the MPC decided to keep the policy repo rate unchanged at 6.50% in its December 2024 meeting. The MPC also decided to continue with the neutral stance of monetary policy as it provides flexibility to monitor the progress and outlook on disinflation and growth and to act appropriately. It remains unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

Although there is lack of clarity over the timing of the possible reversion in the interest rate, the peak in the interest rate cycle and the expected rate cut in coming months makes it an opportune time to invest in longer-duration debt mutual funds.

Bond prices and interest rates are inversely related. When interest rates fall, debt mutual funds that invest in longer maturity securities tend to gain. Funds that invest in the short maturity segment witness minimal mark-to-market impact when interest rates fall.

On the other hand, funds focusing on longer duration instruments that have an average maturity typically in a range of 5 to 10 years are highly sensitive to interest rate changes and tend to do well during stable and falling interest rate scenarios.

For a medium-term investment horizon of 2-3 years or more, Dynamic Bond Funds, Banking & PSU Debt Funds, and Corporate Bond Funds may be suitable avenues, while Gilt Funds may be suitable if the investment horizon is 5 years or more. On the contrary, for an investment horizon of up to or less than a year, short term debt categories such as Liquid Funds may be suitable.

Investors should always assess their risk appetite and investment time horizon while investing in debt funds. And prefer the safety of the principal over returns. Remember, investing in debt funds, in general, is not risk-free.

Gold

Gold enjoyed a year-long rally and was the best-performing asset in 2024, despite strong performance by risk assets, a stronger US dollar and elevated bond yields. The precious yellow metal gained a stellar 20.6% absolute return during the year, as of December 30, 204. The price per 10 grams of gold stood at Rs 75,874 as of December 30, 2024. The rally was boosted by:

• Central Bank buying fervour

• Resilient-to-strong Asian demand including Chinese bar and coin buying and Indian buyers taking advantage of import duty cuts.

• Geopolitical tension - from significant elections to conflict in the Middle East - encouraging buying and restraining the selling back of gold.

How did Gold ETFs fare in 2024?

Buoyed by the rising equity market volatility and general bullish sentiment towards gold, inflows in Gold ETFs too surged during the year. Gold ETFs generated stellar returns of 19.5% absolute, as of December 30, 2024.

Additionally, according to market experts, the reduction in import duties on gold in India earlier this year resulted in a significant surge in demand for gold, particularly during the Diwali-Dhanteras period. This reflects the consumer's growing recognition of gold's unique ability to balance investment portfolios while at the same time honouring our festive traditions. Furthermore, there is an increasing understanding of holding precious metals in an investment portfolio with the recent uptick of silver too. The ongoing wedding season too is expected to further drive demand for gold. Given these factors, it is expected gold to maintain its momentum through early 2025.

Outlook for Gold in 2025

Gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio. World Gold Council (WGC) analysis shows gold is a clear complement to equities and broad-based portfolios. Gold has historically provided returns, diversification and liquidity. These characteristics combined mean that gold can materially enhance a portfolio's risk-adjusted returns.

Beyond gold's strategic appeal and considering the potential challenges on the horizon, WGC believes that investors should look closely at the portfolio benefits gold can bring in 2025 and beyond.

Gold has historically provided returns, diversification and liquidity. These characteristics combined mean that gold can materially enhance a portfolio's risk-adjusted returns.

Gold investments may be suitable for investors with moderate-to-high risk appetite looking to diversify across asset classes and hold it with a long-term investment horizon (of over 5 to 10 years). Apart from investment in physical gold investors also have the option of investing in gold through gold Exchange Traded Funds (ETFs) or gold savings funds or Sovereign Gold Schemes.

How should investors approach mutual funds in 2025?

Mutual Funds in India will continue to play a significant role for investors looking to create a diverse portfolio spread across asset classes. Depending on their financial goals, risk appetite, and investment horizon, investors can suitably allocate assets in equity, debt, and gold as well as the sub-categories within them.

Equities and equity mutual funds may witness high volatility in the short run due to various domestic and global scenarios in play. However, India's long-term growth prospects remain strong boosted by healthy growth in the corporate sector, favourable demographics, and various reform initiatives undertaken by the central government. Equity mutual fund categories such as Large Cap Funds, Flexi Cap Funds, Multi Cap Funds, Value Funds, and Large & Mid Cap Funds can prove to be rewarding options for investors aiming to benefit from the growth potential of equities at reasonable risk.

For investors with moderate risk appetite, hybrid strategy via Multi Asset Allocation Fund and Balanced Advantage Funds can be worthwhile.

[Read: Best Equity Mutual Funds to Invest Now]

Conservative investors and those with short term investment horizon will potentially continue to benefit from the stability of Debt mutual funds. The expected rate cut in 2025 can result in further rally in Indian bonds, making Debt Funds attractive option. However, investors need to be mindful of credit risk. They should ideally prefer schemes focusing on high quality instruments such as G-Secs, treasury bills, and AAA-rated corporate bonds.

Meanwhile, Gold will continue to play its role as a portfolio diversifier, a safe haven, store of value during macroeconomic and geopolitical uncertainties.

In general, when investing, be mindful of the risk involved -- and do not invest blindly going by just the past returns, which is in no way indicative of the future returns.

Also note, that there's no one-size approach when it comes to investing. Investing is an individualistic exercise. Remember the adage: one man's meat is another man's poison. So don't' carried away with how someone else invests.

You need to pay attention to your financial situation, personal risk appetite, broad investment objective, the financial goals you are addressing, the time in hand to achieve those envisioned financial goals, and make investments accordingly. A sensible approach paves the path to financial success.

Be a thoughtful investor.

Wish you a very Happy, Healthy and Prosperous New Year!

Happy Investing!

Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.