Investors have been waiting patiently to see a sharp reversal in corporate earnings growth. Not all companies in the respective market capitalization have done well; only a handful of companies have rewarded investors well. Currently, trade tensions are weighing on companies whose business is export-oriented, plus there are governance issues with a few companies.

So, avoid getting swayed by the forward statements in the earnings; be cautious of the traps and do not get carried away.  Sadly, the oldest trick in the book of 'estimated earnings' played out is that the near term estimates are toned down while the future earnings estimates have been raised. But the fact is, the actual growth has turned out to be very poor.

With such a scenario, portfolio construction and management has become a challenging task for fund managers, as ultimately earnings need to justify valuations.

What can you expect in 2019?

You're probably aware that only a few stocks have been shoring up broader indices; without their props, the scenario in the Indian equity market looks vulnerable. Plus, if GDP growth, which seems to have lost some momentum, weakens further; it may hurt the bottom-lines of companies. This, in turn, may have a bearing on the portfolio of equity mutual funds and effectively the returns you, as an investor clock.

In addition, a number of factors might weigh on the Indian equity markets in 2019. It is expected to be a year of high drama and high (market) volatility - at least for the next few months.

The Lok Sabha elections are around the corner. After BJP's defeat in 3 states-Madhya Pradesh, Chhattisgarh and Rajasthan---the so-called Hindi heartland, perhaps, the Modi-Shah duo fears defeat or losing a substantial number of seats to the mahagathbandhan (united opposition). Many investors, too, have become sceptical about the current dispensation's chance of getting a second term at the centre.

Reading this many of you might refrain investing in equity mutual funds before the elections thinking that the present government may not get a majority on its own in the forthcoming elections or at worst, it may not even be re-elected.

Have you postponed your investments until election results are declared?

If yes, you are making a mistake.

[Read: Waiting To Invest Until The Outcome Of 2019 Lok Sabha Elections? You're Making A Mistake!]

Let's discuss the key macro factors likely to play out and the impact on the Indian equity markets:

• Political scenario

  As a mutual fund investor, if you are keen to know the impact of elections on your investments, start by ignoring all predictions.

  Exit polls---the game of predictions---irrespective of whether they are based on scientific methods or not can only predict the direction. Therefore, reading too much into numbers isn't going to help you make sound investment decisions.

  In 2003, BJP had done remarkably well at the state elections, which led the then NDA government to think that they had a good chance of getting re-elected. What happened thereafter is history. The 'India Shining' campaign fell flat and the Congress party came to power.

  The decision of the Left parties to support the Congress government from the "outside" worried investors about the stability of the government. Ironically, the Indian markets experienced one of the most secular bull runs under the UPA-1 regime thereafter.

  In 2008, BJP won the assembly elections in Madhya Pradesh, Karnataka, and Chhattisgarh. Its victory in Karnataka against the Congress was considered bigger and more credible compared to the 2007 Gujarat polls (prior to the Lok Sabha 2009 elections). Moreover, the Congress party had lost out in the Uttar Pradesh elections in 2007, ranking fourth in the contest.

  Despite this, the UPA was re-elected in 2009. The markets celebrated this victory by hitting an upper circuit twice in a day for the first time in history. Were markets able to sustain that momentum thereafter? Unfortunately, they couldn't and gave the UPA-2 a thumbs-down.

  Please note: Indians vote differently in state and Lok Sabha elections.

• Banking sector stress appears far from over

  NPAs in the Indian banking system, increased to around Rs 10.4 trillion (or 11.2% of advances) as on March 31, 2018, compared to Rs 8 trillion (9.5% of the total loan) as on March 31, 2017. The RBI in its bi-annual Financial Stability Report (FSR) states that in the baseline scenario the gross non-performing asset (NPA) ratio may decline from 10.8% in September 2018 to 10.3% in March 2019 and 10.2% in September 2019.

  RBI's new Governor, Mr Shaktikanta Das, is of the view that after a prolonged period of stress, the load of impaired assets was receding. However, an industry-wise assessment done by RBI reveals that for certain sectors like construction, mining, and food processing, the NPA stress is rising.

  According to RBI's analysis, and as reported by LiveMint, despite projections of a recovery, 18 SCBs, including all public sector banks under the prompt corrective action (PCA) framework, may fail to maintain the required capital adequacy ratio under a two SD (standard deviation) shock to the GNPA ratio, unless capital infusion takes place and banks improve their performance.

  Despite capital infusion by the government in the past, balance sheets of many Public Sector Banks (PSBs) still appear stressed. This could block credit flows to the productive sectors of the economy for some more time and growth may hinder.

  If the government fails to shore up its revenues and as a result, if fiscal deficit overshoots the target of 3.4%, India's credit rating might be negatively impacted.

  Also, given the recent instances of high-profile fallouts such as IL&FS and DHFL in the debt market, banking sector stress is unlikely to fade in a jiffy.

• Trade war issues aren't settled yet

  If the U.S. and China fail to draw a concrete and mutually agreeable plan to de-escalate the trade war situation before March 1, 2019, the global equity markets might experience unusual volatility.

  The U.S. has called the March 1, as the 'hard deadline', after which it will impose 25% tariffs on China's exports of worth US$ 200 billion from the current 10%. The extension of this deadline is still possible but the U.S. isn't keen on this option, at present.

• Crude oil prices are going up again

  The crude oil prices, after the December 2018 lows, have bounced back approximately 20% so far. Given the fragile geopolitical situation in many parts of the world, it would be unwise to assume that crude oil prices will not boil again.

  Any supply shock at the global scale may weigh on India's import bill and in turn adversely affect India's Current Account Deficit (CAD), eventually, causing the Indian rupee to weaken against the U.S. dollar.

Besides these major factors, others such as farm distress, lack of job opportunities, and economic growth losing momentum may hamper the equity market movement in 2019.

On the aforesaid backdrop (and a number of other factors in play), it would wise to take note of the famous quote, "Be fearful when others are greedy and greedy when others are fearful", by the legendary investor, Warren Buffett.

When you approach equity mutual funds in an endeavour to clock a better rate of return to accomplish your financial goals, prefer schemes from fund houses that follow robust processes & systems.

Careful selection of mutual fund schemes has become extremely crucial. Look for schemes that have fared well consistently across longer time periods (3 years and more) and market cycles (bull and bear phases).

Never pick equity mutual funds by:

- Giving importance to the short-term market outlook

- Depending extensively on the past track-record of a scheme

- Relying blindly on star-ratings

- Disregarding qualitative aspects associated with mutual fund selection

- Ignoring your risk profile, investment objectives, financial goals, time horizon and the personalised asset allocation best suited for you

- Relying on the advice given by friends and relatives unqualified to give you advice on mutual funds

Also, set you return expectations right; do not expect abnormally high returns.

[Read: Why Comparing Returns to Risk Is More Meaningful!]

Prefer SIPs to invest in mutual funds

Once you select a worthy equity mutual funds for your portfolio start investing in them preferably through Systematic Investment Plans (SIPs) and make sure you have an investment time horizon of at least 5-7 years.

With SIP you will be able to mitigate the risk involved better vide the benefit of rupee-cost averaging.

[Read:  Best SIPs To Invest in 2019]

Don't discontinue your SIPs in worthy equity mutual funds in the present market conditions, fearing the volatility on account of any adverse factor in 2019.

If you invest in worthy mutual fund schemes through a SIP and opt for direct plans, you could be on the right path to wealth creation and accomplishing your financial goals.

Editor's note: 

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This report tells you about five worthy, high growth potential equity schemes that can be instrumental in building significant wealth over the next 5-7 years.

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Happy Investing!

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