Equity-oriented mutual fund schemes generated returns of about 25 per cent during the lockdown period amid a recovery in broader markets and liquidity infusion by the RBI coupled with the government's stimulus measures, experts said, as per a report in PTI. However, some analysts believe this is nothing more than a bear market rally. 

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Although mutual funds gained from the bounce back from March lows, their long-term returns still look bad, said Vidya Bala, co-founder of PrimeInvestor.In.

According to data compiled by Morningstar India, all the equity scheme categories -- equity linked saving scheme (ELSS), mid-cap, large and mid-cap, large-cap, small-cap, mid-cap and multi-cap -- have given returns in the range of 23-25 per cent between March 25 and June 3.

Individually, large-cap funds have given a return of 25.1 per cent, followed by multi-cap (25 per cent), ELSS as well as large and mid-cap funds (24.9 per cent each), small-cap (24 per cent) and mid-cap (23.2 per cent). Broader markets have recovered 25-30 per cent during the period under review. However, most of the active funds underperformed their respective benchmark indices.

The nationwide lockdown to combat the spread of COVID-19 infections started on March 25 and it has been extended by some states till June 30 in the containment zones. Prior to this, all the equity schemes had given negative returns, in the range of (-) 32-37 per cent, since the beginning of the bear market on February 19 to the announcement of lockdown on March 24.

Prateek Mehta, co-founder of Scripbox, attributed the positive return by mutual funds to steps taken by the government and central bankers across the globe over the last 12 weeks. "In India, it seems that the market fall has been broken by the RBI rate cuts, extensive government measures and return of the FPIs in May and June," he added.

Amit Jain, co-founder and CEO at Ashika Wealth Advisors, said this positive return could be due to stimulus packages announced by governments across the globe. 

During the period under review, Nifty 50 delivered a return of approximately 21 per cent, while equity mutual funds generated 25 per cent due to combination of factors -- liquidity infusion and relaxation of lockdowns across economies -- that buoyed investor sentiments, according to Bajaj Capital Research. "Massive liquidity injections by the RBI in conjunction with the government's stimulus measures (to the tune of approximately 10 per cent of GDP) were aimed at bolstering the economy by mitigating the fallout of the pandemic. The measures buttressed the reinstating of risk-on sentiments," it said.

In addition, the surge in oil prices by 40 per cent in May after a prolonged hiatus and decline in global infections also helped in improving investors sentiment.

However, Bala said, "We view these as bear rallies, driven by derivatives positions and momentum. Also, inflows from mutual funds helped prevent a slide caused by FPI selling. Less than a fifth of the Nifty 500 stocks have crossed their January highs suggesting narrow rally."

Bear market rally, in market parlance, refers to a short-lived upward trend in prices during a longer-term bear market. Echoing the views, Kaustubh Belapurkar, director - fund research at Morningstar Investment Adviser India, said equity markets rebounded sharply from the lows made in the second half of March and this happens in a bear market rally.

Foreign Portfolio Investors (FPIs), which sold significantly in March, have invested money in equities over the last month, he added.

Going ahead, Bajaj Capital Research said the rally might not be sustainable as it reflects a dichotomy between real economy and the equity market. "With real economy in doldrums, it will be too optimistic to assume that inflows will continue perennially," it added.

Belapurkar advised investors to focus on asset allocation and continue with their investments and systematic investment plans (SIPs). If an investor is under-allocated to equities as per his risk profile, he should continue to allocate systematically towards equities, he said. He further said investors should keep at least 7-10 year investment horizon in mind with a volatile asset class like equities.

During February 19 to March 24, broader markets plummeted by 35 per cent and equity mutual funds tanked by 37 per cent. The market fall was primarily due to the COVID-19 outbreak. Besides this, the heightened geopolitical risks in the form of US-China tensions exacerbated the already precarious situation. The outbreak of COVID-19 had led to a massive selloff by FPIs in February and March.