Indian Rupee (INR) is on a free fall nowadays.
Recently, it touched an all-time low of 69 against the US dollar (US$).
Global factors such as trade-war fears, monetary tightening in the U.S., and rising oil prices have been warfronts for the Indian rupee (INR).
And against this backdrop, some media reports are drawing attention to the record-high exposure of mutual funds to Information and Technology (IT) sector.
Since big IT companies operating from India are mainly export-oriented, depreciation of domestic currency helps them boost their Indian rupee earning—for no change in the US dollar earnings.
In May 2018, mutual funds collective had investments to the tune of Rs 72,557 crore in the IT sector against Rs 44,018 crore in May 2017—a jump of 65%!.
So, are mutual funds really betting big on IT companies?
Certainly doesn't look like it.
As on June 29, 2018, the weight of IT in BSE Sensex and BSE 200 was 13.2% and 10.6% respectively.
On the contrary, most of the top mutual fund houses (by Assets Under Management or AUM) had a single digit exposure to IT this year in May, as well as last year.
IT—Is it really a favourite of mutual fund houses?
(Source: ACE MF, PersonalFN Research)
This falsifies the media’s claims of mutual funds betting big on IT.
So how can we explain the record high investments made by mutual funds in IT?
Good question.
The record exposure is mostly on account of appreciation in the value of existing investments and not due new investments.
Over last one year, even bluechip IT stocks have rallied over 30% and mid-sized IT companies have witnessed rallies of even higher magnitude.
Had mutual funds been investing the higher amount in IT (fresh inflows), their percentage exposure would have gone significantly up as well, which doesn’t seem to be the case right now.
This, in fact, shows that there is much more to the Indian rupee depreciation story.
Mutual funds don’t seem to be betting big on IT, because they are possibly unconvinced about the sector’s prospects.
Noteworthy: The Indian rupee is not the only currency to suffer. Most other Asian currencies are falling too. Perhaps the emergence of trade war due to the protectionist policies of US President, Donald Trump, is hurting many currencies while the dollar is getting stronger.
This is not to say that, the U.S. will eventually ban IT imports from India; it only means that Indian IT exporters are feeling the heat with escalation in trade wars.
So what explains the rally in IT stocks?
In FY 2015-16, financial stocks had a weight of about 29% in BSE Sensex which grew to 40% in FY 2017-18.
In contrast, the weight of IT from 18% in FY 2015-16 fell to 11% in FY 2017-18.
Usually, such divisions don’t sustain for long. As a result, valuations of many Indian IT companies fell to multi-year lows which triggered a sharp bounce back in a number of IT stocks.
[Read: Are Banking Sector Mutual Funds Worth Risking Your Money?]
[Also read: Are Pharma Funds The Next BIG Bet For You? Know Here…]
Are media reports misleading then?
Well, they certainly seem to be half-baked. The movement of markets and stocks isn’t as straightforward as one might end up believing after reading these reports.
The depreciating Indian rupee may not always be beneficial to Indian IT companies, especially if there’s a threat of losing business.
What should you do?
You should avoid investing in sector funds with the notion that a particular sector (which is in the news) has better prospects.
Many times, the media reports are under researched, and basing decision on them may not help.
When you invest in mutual funds, consider the diversified equity funds that have a proven track record of performance across timeframes and market phases. Their risk-adjusted returns should align with your risk appetite and the return expectations.
So, before you invest in mutual funds, do consider your risk appetite and financial goals. Based on these factors, you should chalk out an asset allocation plan for yourself and then start investing in diversified mutual fund schemes accordingly.
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ramaswamium@gmail.com
Jul 07, 2018
How unethical can ICICI group get is revealing ! Another issue that I consider unethical is Mutual Fund Sahi hai ads. First the ads themselves are objectionable. In the midst of doing Yoga they talk about MF, in the midst of a classical concert they talk about MF! Showing wrong behaviour to the audience. Next the number of varieties of Ads : In a Samoza shop, in a concert, in a Yoga session, along with a turbaned Sikh gentleman et al. Even Colgate and HUL do not have so many varieties for one product ! Now why ? I find the MF houses are sloshing with money . Some even are seen to hold cash waiting for price corrections . The ads go from the gains of the fund houses which to some extent at least are contributed by the investors . In other words MF Sahi hai is avoidable expense at the cost of investors. |
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