Current scenario of mutual funds in India
Very recently I am receiving many questions in Quora regarding Current scenario of mutual funds in India. Having received many such questions, I have decided to take one particular question which is Why have almost all mutual funds of India given negative returns since the last six months? It’s really feeling very nice to see that such young people are making many queries as soon as they have just started showing interest at the beginning of their earning career.
Surprisingly, they are very much worried about the falling mutual fund returns. This means they are tracking the performance of their investments at least for regular intervals of 3 to 6 months. Which every mutual fund investor is supposed to do. So, this has prompted me to write a blog post on the Current scenario of mutual funds in India.
Before answering to this specific question, I would like to reiterate that investment in Mutual Funds should always be linked to the financial objectives. If the investment is not linked to any financial goals, this means one is a short-term investor. In that case, a short-term investor has to have faced the short-term market volatility.
The market will not always be in perpetual high mode. There has to come volatility i. e. ups and downs. Experts are continuously cautioning investors that for last 10 to 15 years, MF industry has delivered an average return of 12 to 15% and may be much more in some occasions, but most of the investors could not take advantage of this opportunity.
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This is mainly because investors always try to time the market. They don’t continue with their investments according to the plans, do not link financial objectives to investments. As a result, when the market starts showing some degree of risk or volatility, they have done away with their investments. So, the main problem remains at the entry and exit to and from the market.
As a sound investment plan, financial advisors always ask you regarding your financial objectives and the necessary time horizon to achieve that target. If your goal is a very short term, they would bar you from investing in equities and rather advise you to go for debt funds or fixed interest bearing instruments.
On the other hand, if your goal is more than 5 years, he would advise you to invest in a balanced fund. If, the goal is very long term say 7 to 10 years away, he would advise you to go for pure equity MF, and also tell you to withdraw your full investment and park into liquid fund or short term debt funds when your goal is nearing say 1 to 2 years away. This is called smart investing plans. Everyone needs to strictly follow that plans.
Therefore, even short-term volatility cannot touch your investments and doesn’t make any impact for the long-term investors and you should not be scared of at all.
Current scenario of mutual funds in India. Why is the market going down day by day?
Look, as I mentioned before that market will not be on the ups for perpetual. It has to come in red sometimes, otherwise, how rupee cost averaging will work. How, the average cost of investment will remain low, had not the market remain volatile and sometimes goes to red.
This rupee cost averaging system along with the power of compounding helps the investors to get to the desired corpus that they have already planned. If the market remains on the higher side always, your cost of investment will be higher day by day. That is not desirable at all.
There are several micro and macroeconomic factors that work either directly or indirectly to keep the market sentiments down. Even some international factors also work to change the mindset of the stock market investors. There are some indicators like PE(Price to Earning) Ratio, PB(Price to Book value) Ratio that probably indicates Current scenario of mutual funds in India or the current market movements. The market price of all stocks is all-time high as compared to their earning potential. Though it’s not as high as 2008. But this correction was needed indeed.
Following factors would help to understand Current scenario of mutual funds in India
Price to Earnings Ratio or PE Ratio:
PE Ratio is considered to be the most widely used tool for stock selection. This ratio indicates the current market price of a company’s share to its earnings per share. It also implies what the market is willing to pay for its earnings. A high PE ratio implies that the stock is over-priced. An over overpriced stock indicates that the stock’s price is much higher than that of its actual growth potential. In that case, this stock is exposed to drastic crash.
This was quite visible in the big market crash in 2009 for Reliance Companies shares for an example. So, I can say that a high PE ratio is the ideal indicator of warning for an investor to stay away from that stocks of mutual fund portfolio. A high PE ratio denotes that the stock is expensive as compared to its earnings or growth potential.
On the other hand, a low PE ratio implies that the investors are too bullish on the company’s earnings growth potential and they are not ready to pay more for that stock price.
Formula of PE ratio:
PE Ratio= Market Price per Share(MPS)/ Earnings per Share(EPS)
For example, if the current market price of a stock is ₹150 and earnings per share is ₹10,
PE ratio: 15(150/10)
Check the following link for more PE, PB and Dividend yield chart at one place.
Nifty 50 PE Ratio index from 1999 to 2018
Price to Book Value Ratio or PB Ratio:
Price to Book value ratio is used as a tool to measure financial ratio analysis. PB ratio indicates a stock’s market value per share to its book value per share. That is what the investors are willing to pay for the stock price as compared to the book value of the share. The book value of share denotes Net Assets Value attributable to Shareholders or owners of the company.
How of the Book value of a share is calculated:
Book value of Share: (Net Assets Value/No. of shares outstanding)
Where Net Assets value =(Total Assets -Total Liabilities -Intangible Assets)
For example, if the current market price of a stock is ₹150 and book value per share is ₹100,
PB Ratio: 1.5(150/100)
A PB ratio of less than 1 indicates that the stock is underpriced. Whereas, a PB ratio of more than 1 indicates that the stock is expensive.
Final word on Current scenario of mutual funds in India
Though currently, Nifty 50 PE is very much high i.e. 26.62, it is still not as high with that of 14th February 2000 and 9th January 2008 where PE ratio comes to 28.29 and 28.22 respectively.
I hope I have done enough justice to Current scenario of mutual funds in India.