Indian Mutual Fund Industry Analysis. 5 crucial facts you must know.
Indian Mutual Fund Industry is going through a very tough phase for the last couple of months, specifically for the last 12 months or so. The Assets Under Management (AUM) of the Indian Mutual Fund Industry reached ₹24 Trillion in 2018. Everyone was hoping that 2019 is going to be a spectacular year for the equity market.
But so far the Indian Mutual Fund Industry in 2019 has been really very disappointing. In this blog post, I am going to make an in-depth analysis of the Indian Mutual Fund Industry focussing on the last 20 year’s NIFTY, SENSEX data comparison.
Equity investors were eyeing for 2019 Parliament election and voted for Modi 2.0 immensely for high growth and higher returns from the equity market. But the recent policy paralysis as per the industry experts, the global slowdown, low domestic consumption, weaker vehicle sales, low air traffic growth, and other macro factors have caused this economic slowdown. As a result, the equity market is losing its momentum gradually and the expectation that arose before the election has come to an end reversely.
Now let’s just see BSE Sensex data for last one year from 14.08.18 to 14.08.19.
As you can see from the above SENSEX data that it was 37,852 points on 14 Aug 2018 and right after one year on 14 Aug 2019 it was closed at 37,311.53 points. So, the 1-year Sensex return is (-)1.43%. This disappointed the investors indeed.
Now let’s have a look at the NIFTY 50 index data for last one year from 14.08.18 to 14.08.19.
From the above NIFTY one year data, you can see that NIFTY was at 11,435.10 on 14 Aug 2018 and it was closed at 11,029.40 after one year on 14 Aug 2019. So, the 1-year NIFTY 50 return is (-)3.55%. Not really overwhelming for NIFTY 50 too.
Current scenario of mutual funds in 2019
This is very crucial for every investor to learn and accept that market(SENSEX/NIFTY) will not be in upward trends for a perpetual mode. For some certain factors, it will go up for a period would stay there for some time and then it will taste the downside trend and obviously stay there for a while to test investors’ patience as well.
This is the bitter truth everyone needs to understand clearly. Sensex delivered 16% CAGR return in the last 10 years and created wealth at 52 percent annualized during April 25, 2003, and January 10, 2008. But how many of the investors did take real advantage of this market situation.
“Actually, what we do in the real scenario is we start buying when the market and price are getting higher, and sell our holdings when both the market and price getting down.”
As per the Economic Times, the bull market started in March 2009 and ended on March 2019 completing a longest and slowest bull market in the history of the Indian equity market. Practically, the bull has got tired and need some rest indeed to come back with full energy in coming years.
Investors just forget about their objectives or financial goals they have just set for themselves before start investing in the equity market.
But whenever they find that the market has sunk a few thousand points, they just start trembling in fear of losing their capital further and withdraw from the equity market.
But do always remember why you have invested in equity i.e. your investment objectives. To make wealth in the long term and not to earn some penny from this volatile market. If you rejoice in getting a return more than the benchmark return, you have to have the courage to get invested in bad phase as well.
And if you can’t, the equity market is not a cup of tea for you. Just make this point very clear before investing in equity-related products.
As a result, inspite of SENSEX delivering a decent return of 16% annually, only a very few investors could hold onto it due to their continuous participarion irrespective of market condition.
Indian Mutual Fund Industry Analysis in 2019 with PE Ratio
PE Ratio= Market Price per share/ Earning per share
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.
Ideally, 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. But this is not so simple in reality.
There are various technical analysis, market segments and other crucial factors for determining the ideal PE ratio.
A few months back in 2018, the Sensex pe ratio was higher more than expected. When there is no growth for the earning but the market price of a share was increasing drastically, everybody was pumping money in the equity market especially the mutual fund industry, the price was moving higher and higher. Remember, a few mutual fund schemes stopped taking fresh investments, this was due to high price of stocks.
There is a real difference between the Price and Value, and by this time you all may have come across these two terms.
Price is what you are ready to pay for buying a share. On the other hand Value is what you get as the intrinsic value from that share. More specifically, value denotes the earning potentiality that a stock has.
Why one investor would pay high price for a share unless he is sure about the intrinsic value or earning potential of that stock. This principle actually was not happening in 2018. There was no such earning growth, but price was increasing drastically which was very unlikely.
This price-value mismatch in last year worked as a camouflage . Investors went on buying high priced less valued stocks or mutual funds seeing the SENSEX or NIFTY index but did not take into consideratio the most crucial indicator PE Ratio.
As from the above data analysis, you can see that though the F.Y 2019-20 has just completed the 1st quarter, the PE ratio is 27.9, which is very high. There have been two great falls in F.Y 2000-2001 to 2003-04(39.26%) and F.Y 2007-08 to 2008-09. But since then the PE ratio has been in upward mode and this lasted for almost a decade.
Though the market is currently trading below by 2600 points from its all-time high 4000 points mark, still there is a high chance of recovering. As the PE ratio is still very much high as compared to its earning potential.
If the market falls by another 3000 to 4000 points in the next few quarters, this won’t be very much surprising for me considering the previous statistics. Ultimately it will help the bull again to come back more strongly. This way Indian Mutual Fund Industry has worked for the last 30 odd years and is expected to continue the past trends in the future as well.
But at the same time, you must keep in mind that Indian MF industry is no longer based upon look west(FDI,FPI) scenario, rather it has consolidated itself on a stronger domestic framework. The domestic retail investors’ strong participation has taken this industry to a new standard. Look at the below figure and you would be amazed from the domestic investors’ point of view.
The mutual fund industry has grown manifold and the number of mutual fund folios went on increasing drastically. As of June 2019 there is a total of 8.38 Crores mutual fund investors account. The average assets under management per account is now Rs.63,701 as per AMFI data This clearly shows that the number of folios in both the equity and debt schemes has grown rapidly on year on year basis.
Since it is next to impossible for anyone to time the market, I would request everyone to continue your investment or start afresh for a longer period. Only then this short to mid-term volatility can’t make any harm to your investment portfolio.
Also remember that whenever the price of any product is likely to come down, that phase should be considered as the portfolio consolidation and increase your monthly investment as much as you can.
Final words on Indian Mutual Fund Industry analysis 2019
I am very much optimistic about the Indian Mutual Fund Industry and I hope you should be too. Just keep in mind a few points that what is your investment objectives, you are here to create long term wealth and not for making quick money through intraday trading. You might have set some financial goals just stick to these in the volatile market too.
Invest according to your objective, have patience, keep calm and stay invested for a longer period of more than 10 years. Always take help of the financial advisers. These are the main mantra to take advantage of this equity market.
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