Time MFs put money into the market

The Indian stock markets should ideally reflect the strength of the domestic economy and corporate fundamentals rather than get totally swayed by the risk perception of foreign institutional investors (FII). FII net sales of about $6.1 billion (year to date), does not in any way mean that the economy has lost steam.

Spiralling inflation, partly due to the sharp surge in prices of crude oil and other commodities, and monetary tightening (in particular, the latest measures) will slow growth, but not enough to take the economy downhill. Nor does it warrant large-scale selling on the stock markets.

Almost all stocks have been hammered down by the bears, and many blue-chips are trading at prices close to their 52-week lows. Worst-affected sectors include realty, banking and capital goods. Power and oil stocks have also been battered.

But then, stock markets are not for the faint-hearted. In volatile conditions, investments made with short-term horizon are bound to give negative returns. Staying invested in the medium-to-long term will be rewarding; the sensex and Nifty have returned about 23-24% per annum over the past three years and about 30-31% a year over the past five years, even after erasing nearly all the gains made over the past one year.

Retail investors would do well to invest through mutual fund schemes, the best managed diversified equity scheme delivered 35% per annum over a three year period and about 52% a year over the past five years.

Asset management companies (AMCs) have overall been net buyers this year. But with uninvested funds and cash equivalent estimated at more than Rs 20,000 crore in hand, AMCs have the potential to change the sentiment in the market.

Retail investors in mutual fund schemes have not rushed to redeem their investment this time. Instead, many continue to make fresh investment in schemes. That should provide fund managers some comfort. And therefore, rather than wait for positive developments on policy making, fund managers must step up active buying.

Retail investors can also seize the current market conditions to strengthen their portfolio with blue chips, which are now available at reasonable valuation.