Nifty 50 set for first annual fall after a decade of positive returns: Should index mutual fund investors be worried?

The Nifty 50's 10-year-long winning run faces a crude challenge. Already down 11% on a year-to-date basis and with no end in sight to the headwinds being faced by the Indian stock market, the benchmark Nifty index could post its first annual decline after a decade of back-to-back positive yearly gains.

This poses a unique challenge for investors for whom index funds make up a large chunk of their portfolios.

Indian stock market on back foot

This year's underperformance on Dalal Street comes due to the sharp spike in global crude oil prices following the Middle East conflict between the US and Iran, which is in its fourth month. From a sub-$68 per barrel level, Brent crude futures have risen to almost $92 currently. At one point, prices had touched $120.

For India, the world's third biggest crude importer and consumer, this poses a significant challenge, ranging from pressure on its current account deficit, currency, inflation and India Inc earnings. Several global brokerages, as a result, have turned wary of the India story, lowering their ratings and slashing their year-end targets.

From JP Morgan, HSBC, Citi, Nomura to Goldman Sachs, the Indian stock market is no longer on anyone's wish list.

Citi Research has cut its year-end target for the Nifty 50 to 27,000 from 28,500 earlier, citing growing risks to India’s growth and corporate earnings outlook from the West Asia war. Separately, Nomura has also reduced its December 2026 target for the Nifty 50 by about 15% to 24,900.

Growing pressure from selling by foreign investors has also hurt the Indian stock market. FPIs have withdrawn $300 billion from Dalal Street already.

What does the ongoing pause in Nifty rally mean for index investors?

However, this does not mean the long-term growth story for India is over, said Dr. Ravi Singh – Chief Research Officer – Master Capital Services Limited.

"The economy still remains one of the fastest-growing among major nations, domestic SIP inflows continue to stay strong, and government spending on infrastructure is supporting growth. In my view, the current correction looks more like a healthy pause after a long bull run rather than the beginning of a prolonged bear market," he added.

For index investors, the current market trajectory serves as a reminder that equity market returns are not linear. Singh said that while this can feel uncomfortable for investors who entered the market recently, especially after seeing continuous rallies over the past few years, historically, temporary declines have always been part of long-term wealth creation in equity markets.

The current phase of decline offers investors the opportunity to accrue the benefit of rupee-cost averaging. "One of the fundamental principles of index investing is accepting that there will be periods when returns are muted or even negative. Trying to time the market based on short-term performance can often do more harm than good," said Himanshu Srivastava - Principal, Manager Research, Morningstar Investment Research India.

He advised to periodically review and rebalance the portfolio to ensure that their investments remain aligned with their long-term objectives.

Expressing optimism on the Indian stock market's long-term growth prospects, analysts do not rule out a trend reversal in case of an end to the US-Iran war. "Even moderate single-digit earnings growth, coupled with a market re-rating as the West Asia crisis eases, could result in double-digit returns for the Nifty from current levels," Ashwini Shami, President & Portfolio Manager, Omniscience Capital, told Mint in a recent interview.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.