Why Your Mutual Fund Portfolio Isn't Rising

The recent surge in the Sensex and Nifty indices has left many Indian mutual fund investors confused about the performance of their portfolios. While these benchmark indices are reaching record highs, many mutual fund investors are experiencing stagnant returns. The primary reason for this discrepancy lies in the nature of the market rally, which has been largely driven by a select few large-cap stocks. Major players in this rally include banking giants like HDFC Bank and ICICI Bank, alongside Reliance Industries Ltd.

As these index heavyweights surge, it is important to note that a significant portion of the Nifty 50 stocks remain far from their all-time highs. Sectors such as IT and pharma, which have faced challenges due to external pressures like tariff policies, are still struggling. Many of these stocks have recorded losses this year, contrasting sharply with the 10 percent rise in the Sensex and Nifty since January.

The narrowness of this market rally raises questions about whether other stocks will eventually catch up. Valuations for mid-cap and small-cap stocks appear inflated compared to their fundamentals. This situation is creating uncertainty for new investors, as many have not seen significant gains in their portfolios despite the overall market rise. Even those investing through Systematic Investment Plans (SIPs) may find their returns lagging behind the index growth.

Another contributing factor to the muted performance of mutual funds is the slowdown in the initial public offering (IPO) market. A significant portion of investor funds has been diverted to IPOs, which predominantly involved offer-for-sale arrangements. This shift has drained liquidity from the secondary market, affecting mutual fund inflows.

Additionally, Indian stock markets have not aligned with global market trends, particularly the AI-driven stock rallies observed in the US and Europe. India has also seen a decline in foreign portfolio investment flows recently. However, the prospect of a US Federal Reserve interest rate cut could potentially alter this dynamic, leading to increased equity inflows into emerging markets like India.

For the positive momentum in the market to sustain, several factors must align. A continued decline in crude oil prices is crucial, as it impacts inflation, currency stability, and the current account deficit. Moreover, if the US Federal Reserve cuts interest rates, it could lead to lower rates in India, further attracting foreign investments into Indian equities. This combination of factors may eventually help mutual fund portfolios reflect the broader market growth.