Why Your Mutual Funds Aren't Soaring with Sensex and Nifty
As the Sensex and Nifty reach record highs, many investors are questioning why their mutual fund portfolios are not reflecting this positive trend. The main reason for this discrepancy is that the recent rally is driven by a limited number of heavyweight stocks, particularly in the banking sector, such as HDFC Bank and ICICI Bank, along with Reliance Industries Ltd.
Despite the overall rise in these indices, nearly half of the Nifty 50 stocks are still far from their all-time highs. Key sectors like IT and pharma are under pressure and have not recovered as much as the broader market. For example, many of these stocks have experienced losses this year, even while the Sensex and Nifty have seen a 10% increase since January.
Interestingly, less than a quarter of the stocks in these indices are leading the rally. This means that many investors may feel left behind. There are concerns about the valuations of mid-cap and small-cap stocks, which are considered to be high compared to their fundamentals. This situation is further complicated for new mutual fund investors who are not seeing significant gains, as the Sensex has only returned to levels last seen in September 2024.
The situation is exacerbated for those who invested a lump sum a year ago, as they may only be recovering notional losses. Even regular investors using the SIP route may find their returns not matching the Sensex's rise. Additionally, the IPO market, which had been vibrant, is now drying up. This shift could redirect funds back into the secondary markets, potentially boosting mutual fund inflows.
Moreover, Indian stock markets have not aligned with global trends for much of this year, especially with the surge in markets driven by AI stocks in the US and Europe. India has seen a decline in foreign portfolio investor inflows until recently, but with the possibility of a US Fed interest rate cut, the landscape might change, attracting more equity flows into emerging markets like India.
For the current momentum to continue, several factors need to align. A decline in brent crude prices, which greatly affect the Indian economy, will be crucial. Lower crude prices can help control inflation and stabilize the rupee, which are vital for market growth. Furthermore, interest rate cuts in the US could lead to lower rates domestically, encouraging investments in Indian equities and supporting the ongoing market rally.
