April 28 2017
Two days back, the BSE Sensex closed at 30133.35, its all time high value. It touched its last highest value of 30,024.74intraday and closed at 29380.73 on 4th March 2015 i.e. almost two years back.
The question around that time was if market was at the peak and if it was the right time to invest. The investors are asking the same question again now. They want to know if equity market will fall from here, or whether it can still generate further returns or if it is the peak of the market and further investments should be either put on hold or postponed.
We wish to refrain from predicting the stock market movement, as our guess shall be as good as yours, and nothing more. However, to understand what lies ahead for investors, let’s first understand how the mutual funds work. Take a look at the returns of some of the funds in last two years.
|Scheme||NAV on 4th
|NAV on 26th
|Debt-Short Term Funds|
|Franklin India Short Term Income Plan-Growth||2856.8902||3404.9902||19.19||8.51|
|Birla Sunlife Short Term Opportunities Fund-Growth||22.7427||27.2394||19.77||8.76|
|DSPBR Income Opportunities Fund-Growth||22.2543||26.9954||21.30||9.41|
|L&T India Prudence Fund-Growth||19.701||23.918||21.41||9.45|
|ICICI Prudential Balanced Fund-Growth||94.61||115.23||21.79||9.61|
|HDFC Balanced Fund-Growth||110.106||134.338||22.01||9.70|
|Diversified Equity Funds|
|Kotak Select Focus Fund-Growth||23.76||30.102||26.69||11.64|
|Canara Robeco Emerging Equities Fund-Growth||59.62||83.81||40.57||17.18|
|Mirae Emerging Bluechip Fund-Growth||30.124||44.283||47.00||19.65|
* Sensex touched an intraday value of 30024.74 and closed at 29380.73.
Observations from the above data:
1. The sensex started with a value of 100 with 1979-80 as base year. Over its last 37 year journey, it has crossed several PEAKs and has created new ALL TIME HIGH values. As it has reached 30,000, it has certainly crossed earlier peak values of 10,000 or 20,000 or 25,000 and so on.
2. The above table shows that the sensex first touched 30,000 in March 2015, and has again touched the same value after two years. In this two year period, several categories of mutual funds have surpassed their earlier NAVs. Also, as can be seen from the above table, the Sensex has given 1.18% annualised return over last two years, whereas the various categories of funds have delivered 8-20% returns.
3. The safety oriented debt funds have delivered 8-9% returns whereas balanced funds which invest both in equity and debt have given 9-10% returns. The more aggressive diversified equity funds have delivered 11-20% returns during the same period.
Learnings from the above Data
1. Short term debt funds have given 8-9% returns over last two years in comparison to Sensex return of 1.18%. The returns may not be spectacular like equity funds, but then they are not as volatile also.
Debt funds provide consistent and regular returns as they invest in fixed income securities like Bank CDs, Govt. Bonds, Corporate Bonds, Money Market Instruments and treasury bills. They do not invest in the stock market, hence Sensex value has no bearing on their performance. Any time is a good time to invest in debt funds for safety and regularity of returns.
Investors who wish to keep their money safe and also want to earn returns higher than bank fixed deposits over one year and more, may consider recommended debt funds for investment without worrying about the Sensex value. In fact,the earlier the investment is made in these funds, the better it is.
Depending upon the availability of funds, an investor may choose to invest in debt funds as a lumpsum or through monthly systematic mode.
2. It is correct that over short periods, the value of equity funds move along with the Sensex i.e. giving positive returns when the sensex moves higher and givingnegative or lower returns when the Sensex goes down. But as can be seen above, over longer period of 2-3 year and more, theirperformance is not perfectly related to the stock market.
In the above table, during the period 4th March 2015-26th April 2017, the sensex has given 1.18% returns but the various equity funds and balanced funds have been able to deliver 10-20% and 9-10% returns respectively.
The reasons behind equity funds outperformance over sensex over long periods are:
a. Sensex comprises only 30 stocks and therefore its value represents only thirty companies. Whereas, in India, there are more than 5500 listed companies. The valuation of all of these 5500 companies is not reflected in the Sensex.
b. It is not necessary for the mutual funds to invest only in these 30 companies. They have a large number of companies available to them to analyse and invest. At any given point of time, even when the markets are at highest value, there are always some companies whose share prices are undervalued and hence fund managers, seek these companies and invest in them for their future growth potential.
c. Even in Sensex, there are always some companies which are performing better than the others due to their inherent business strength, growth sectors they represent or due to cyclicality of business. A fund manager can always avoid the laggards and invest only in Sensex companies which are delivering better returns to the investor. Thus, by only avoiding the laggards, the equity mutual funds can still deliver better returns than the Sensex over longer period.
3. Balanced funds invest both in equity and debt. Normally, a balanced fund invests 65-70% of the funds in equity and 30-35% in debt. When the market moves up, the equity portion in a balanced fund goes up due to increased stock prices. To maintain the previously set allocation, balance fund sells stocks. In a way it sells stocks when the market is high. When the market moves down, the equity allocation reduces and to maintain its proportion, it buys shares. In a way, it buys stocks when the market is low.
Due to buying shares when market is low, and selling shares when the market is high, a balanced fund is able to generate positive returns over 2-3 years. During such a long period, there are several instances when the market goes up and down and a balance fund is able to take benefit of thisfluctuating market.
Between March 2015 and April 2017 also, the market has been quite volatile. It touched low of 22500 in February 2016, move up in October 2016, went down in December 2016 and again went up in March-April 2017. The balanced funds have benefitted from this market volatility and have generated 9% annualised returns over the two year period vis a vis 1.18% returns of the sensex.
The key to successful investing is not to worry about the market but to plan the investments depending upon one’s needs and expectations. The investments can be planned through appropriate asset allocation in debt, balanced and equity funds.
Investment for short duration can be planned in recommended debt funds which are relatively safe in nature and generate regular returns. They are NOT related to the stock market hence investments in debt funds can be done anytime.
Investments in recommended equity and balanced funds can be planned for higher growth through Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs). In both cases, since the money gets invested in small amounts every week or month, the current Sensex value, whether high or low, does not make much of a difference.
Summing up, today Sensex may be at its highest value, but as the companies grow, it will keep on scaling higher peaks in future just like it has done several times in past years. And by investing in fixed income securities or high quality companies, the top recommended debt, balanced and equity funds shall keep on delivering attractive returns to investors.
As always, your views and feedback on the above are welcome.
Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at firstname.lastname@example.org.