Sensex, Nifty near all-time highs: Is it right time to invest in equity mutual funds?

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Published: July 2, 2019 5:10:17 PM

For the last 2-3 years, while the Sensex and the Nifty have been touching new all-time highs, the broader markets – especially small- and mid-cap stocks – are lagging behind.

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Stocks markets are behaving quite unusually for the last 2-3 years. While the Sensex and the Nifty have been touching new all-time highs, the broader markets – especially small- and mid-cap stocks – are lagging behind. So, mutual fund (MF) investors are baffled, why their funds are not performing well or are giving negative returns despite the markets going up!

This is because a few top stocks, out of the 30 stocks in the Sensex and 50 stocks in the Nifty, are surprisingly going up, while the rest of the stocks are not performing well. As the portfolio of any equity scheme consists of about 100-200 stocks, good performance of 5-6 top stocks can’t compensate under-performance of the rest of the stocks. Moreover, only large-cap funds contain the top Sensex and Nifty stocks, which somewhat cushion the poor performance of other stocks in the portfolios. But in case of small- and mid-cap stocks, where almost all the stocks are under-performing, the returns turn negative.

So, is it the right time to invest in equities or equity MFs?

Going by the Price Earning (P/E) ratio, both Sensex and Nifty are quite expensive with P/E of over 29. But it’s very narrow market run and if the few top performing stocks are taken out, the broader markets are not performing well and have comparatively lower P/E ratio.

So, in that case, will it be profitable to invest in the funds that don’t have the expensive stocks in their portfolios?

But again, while pricing of such stocks are cheaper, earnings of the companies are also below expectations. As a result, with both price and earning are down, the P/E ratio is not very attractive. Moreover, with the Gross Domestic Product (GDP) showing a growth rate of 5.8 per cent for the January-March quarter of financial year 2018-19, which happens to be lowest growth rate in the past five financial years, combined with 45-year high jobless rate, dwindling exports, distressed farm sector and liquidity crisis in NBFC sector, the economic outlook is also not very positive to boost the sentiment and drive consumption and earnings.

Not only the National Sample Survey Office’s (NSSO) job survey for 2017-18, that has been released by the Ministry of Statistics and Program Implementation (MoSPI) after a long delay, has shown a spike in the unemployment rate to a 45-year high of over 6 per cent, but sluggish growth in the agriculture, forestry and fishing sector (2.9 per cent growth), the mining sector (1.3 per cent growth) and manufacturing (6.9 per cent growth) led the slowdown of economy.

Moreover, with very low demand for essential FMCG items like tooth paste, even the rural markets are not very supportive. Quick revival of demands in rural India also look very bleak, as Non-Banking Financial Institutions (NBFCs) that are primary lenders to the rural economy are also facing liquidity crisis.

The key to solve the problem is now with India’s first woman Finance Minister – Nirmala Sitharaman, and everybody is hoping that she will pull the economy out of the crisis to restore faith, generate employment and demand, which would in turn boost the earnings of the companies and returns on investments.

So, the Budget will make it clear how soon the things will turn positive to generate higher return for the investors. But there is no harm to start a systematic investment plan (SIP) or continue the existing SIP as this mode of investment takes care of the impact of market fluctuations.

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