Recently, the Chief Economic Advisor (CEA) of India presented the Economic Survey 2017-18. As you might be aware, the Economic Survey is a flagship report of the Ministry of Finance which evaluates India’s economic performance over last one year and measures the effectiveness of government policies.
This year’s report comments on a host of issues ranging from Goods and Services Tax (GST) to Economic Growth to the State of Agriculture, and the state of Indian banks among others.
However, what may raise many eyebrows were the CEA’s comments on the rising stock market and a possibility of a bubble formation in Indian equities. Besides expressing the need to increase vigilance in the stock market under the current market conditions, CEA has categorically warned small investors to be watchful of significant corrections in Indian equities.
The Economic Survey has found that the Indian mutual fund industry registered a robust growth during April 2016 – October 2017. The AUM of
mutual funds witnessed a constant growth in terms of new investment and increase in value of the existing investments as result of overall good market conditions.
India investors: betting big on mutual funds…
|
Number of folios (Crore) |
Net Inflows (Rs Lakh crore) |
AUM at the end of the period (Rs Lakh crore) |
| 2016-17 |
5.54 |
3.43 |
17.55 |
| 2017-18# |
6.36 |
2.53 |
21.41 |
#Upto October 31, 2017
(Source: Economic Survey 2017-18)
The Survey also noted that, the price of an asset is not solely determined by the expected return on that asset. It is also determined by the returns available on other assets.
As pointed out in last year’s Economic Survey, the government’s campaign against illicit wealth over the past few years——exemplified by demonetisation——has in effect imposed a tax on certain activities, specifically the holding of cash, property, or gold.
Cash transactions have been regulated; reporting requirements for the acquisition of gold and property have been stiffened. In addition, the rupee returns compared to holding gold have plunged since mid-2016, turning negative since mid-2017.
All of this has caused investors to re-evaluate the attractiveness of stocks. They have reallocated their portfolios toward shares with inflows through
equity mutual funds, in particular, the ones from 2016-17 amounting to five times the previous year’s level.
Referring to the sudden rise in Indian equities, the CEA, Mr. Arvind Subramanian, said,
"We have seen around the world that when asset prices go up very much, they always tend to come back and so we have to be watchful. The higher the prices go; I think our vigilance should increase correspondingly."
What should you do at this juncture?
As an investor, you shouldn’t speculate on the future market movements. Chasing momentum and investing in stocks or mutual funds that have generated impressive returns in the immediate past may be detrimental to your
financial health.
Instead, follow these simple principals of financial planning:
Instead of basing your decision to invest (or not to invest) in
mutual funds on the outcome of the Budget 2018, you should care more about getting your household budget right.
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