Taking stock: Even as markets touch new high, bet on equities for superior returns

Jun 09 2014, 07:05 IST
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In a dramatic rebound, the average return of infrastructure schemes over the last three months jumped by 50 per cent thereby lifted the three-year compounded annual growth of the group of infra schemes to a reasonable 8.9 per cent. In a dramatic rebound, the average return of infrastructure schemes over the last three months jumped by 50 per cent thereby lifted the three-year compounded annual growth of the group of infra schemes to a reasonable 8.9 per cent.
SummaryIf entire MF industry found it hard to come out with explanation on performance of their funds

has been a reversal in the retail investors’ interest as they are coming in big numbers towards mutual funds. We have seen significant flows in all segments including equities and we expect this to grow further,” said Sundeep Sikka, Amfi chairman and CEO Reliance Mutual Fund. The inflow has been strong even in equities as the net inflow in equity schemes in the month of May stood at Rs 2,452 crore, the highest monthly net inflow since April 2011 when the net inflow for the month was Rs 4,809 crore.

Can this rise continue

Market participants look very optimistic about the future of equity investments and feel that while the short-term rally witnessed in the past may not continue in the same form, it is bound to do well over the next three years. “Over the next three year period, the industrial production is expected to grow at a year on year growth of 10 per cent and interest rates too are expected to drop substantially and would be big positives for the earnings and markets,” said S Naren, CIO, ICICI Prudential AMC.

Another argument that backs markets performance over the next three to five years is that while the markets are at an all time high, the valuations are not. “The earnings trajectory is improving and the 8 per cent earnings CAGR of the sensex companies over the last six years is expected to double. Even though they are trading at all time high levels, markets are still trading at their long term average valuation of around 16 and there would be a re-rating if the earnings come in line,” said Harsha Upadhyaya, CIO, Kotak Mutual Fund.

There may be a possibility that in the current rally the markets may have moved ahead of the economy and there may be a small correction, however, that is unlikely to have an impact on the three to five year horizon.

where will the gains be

A closer look into the market performance shows that while the large caps have gained, it is the mid cap and the small caps that stole the show. If the rally from 2005 to 2007 saw several small and mid cap companies becoming multi-baggers for investors and thereby becoming large companies, experts feel that the potential for such a phenomenon does exist over the next three to five years.

As of now, the rally has taken everyone along — the good or bad,

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