Mutual funds: Why equity MFs are a hot favourite again

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Indian stock markets have witnessed sustained rally and almost doubled over last 16 months. BSE Sensex has sharply risen from a low of 26,000 in end-March’20 to about 52,000 now. The rally has been quite widespread with mid-cap and small-cap stocks increasing 200% to 300% in many cases. The stock market rally has resulted in the existing investors in equity mutual funds witnessing impressive gains in their existing portfolios and creating a positive mindset towards such funds.

Further, most reports are suggesting that Indian economy should show consistent growth over this decade. Large-listed companies will be direct beneficiary of growth in the Indian economy. It is also expected that Indian companies should benefit from inclination of western countries to move away from China and look for alternative sourcing destinations. All such reports are helping in creating a positive bias towards equity investments, which will enable retail investors also to benefit.

Many investors had moved to debt funds from Equity mutual funds fearing economic uncertainty after onset of pandemic last year. Debt funds returns have also been good since then due to continuous pressure on interest rates. However, of late, the interest rate scenario seems to be turning with rise in inflation. Due to sharp increase in commodity prices and supply side pressures, it is expected that inflation will continue to rise in near term. This has made the debt funds with longer maturity unattractive.

Appealing to retail investors

With continuous low rates on bank deposits, investors are left with little option but to look at equity mutual funds for earning superior returns on their savings. Lower rates of taxes, both on short-term and long-term gains are further enablers for investors to look at investments in equity mutual funds.

Retail participation has been very high in the stock markets during this rally. As per NSE data, share of retail participation in June’21 was 45%, up from 39% in March’20. Even SIP accounts have seen a sharp increase with 21.29 lakh SIP accounts registered in June’21 compared to just 9.13 lakh SIP accounts a year back. These indicators seem to suggest that finally the equity investment is spreading in India and retail investors have shown inclination to accept equity as an asset class to park their savings.