Consider these 9 things before investing in mutual funds!

Stock market investment always seems to follow the herd mentality, where what people say have greater impact than what the government does. It is no brainer to say that the environment we live has in some or the other way impact on the stock market prices. However, a huge dilemma is created when environment sentiment and stock market prices are riding opposite waves. Every investor has gone through the sentiment called as “fear of missing out” where he/she feels its now or never scenario and then risk taking a wrong move. In such case it is always difficult to predict which way the market is going, given the opposite trend in the surroundings. Stock market is not a rocket science to understands as there is always certain litmus test available which can help you identify when to go in and when to take a backseat.

Some of these litmus tests are discussed in this article. Let us check them one by one.

GDP

GDP means the aggregate monetary value of all final goods and services sold within a year. In simple terms higher the GDP better the stock market, and vice versa. Stock market prices are defined my numerous factors although one of the basic factor is the profitability of any company. In simple math, higher the sale of goods and services, higher the profitability and eventually higher the valuations of stocks. Therefore, if you produce & sell higher, there is higher probability your stock valuations will be higher. As a basic scrutiny in choosing any stock, we always check the turnover and profit margins of any company and thereby evaluate them. However sometimes the stock market valuations may entirely choose to ignore the GDP as a factor and provide with unexpected returns in low GDP. In such cases we may need to check whether the low GDP score is a temporary phenomenon or has there been a catastrophic downfall.

Interest rates 

Bank are one of many sources of funds for corporates, however in case of companies with low promoter funding, they might tend to be the only source of secured funding, Fund requirements are always task at hand, be it for working capital requirement or for expansion purposes. Bank lends money to corporates at a rate determined by “repo rate” governed by the Reserve Bank of India. Higher the repo rate, higher the rate of interest and higher the stock valuations. In a scenario where the government feels the economy is regressing, it instills it with higher liquidity, meaning greater cash availability at a cheaper rate of interest. As a result, corporates and individual can borrow money at a cheaper rate of interest and flex their spending power. However, sometimes in a complete contrasting scenario, when the repo rate is at all time high the stock market valuations are also trading at all time high, this scenario could be huge deal breaker as such valuations could come crashing down once the market accepts the higher interest costs.

Inflation 

In economic terms, when demand exceeds supply, inflation creeps in. Inflation is natural in every economy, as rise in prices are also deemed to be healthy. Inflation if controlled can be healthy, if not it can wreak havoc in the economy by persistent price rise in the cost of all goods and services. If prices of goods and services are high enough to deter the normal consumers of its usage, it would naturally affect the sales volume of the corporates, which eventually mean low profitability and naturally lower stock valuations. Therefore, investors have to watch out for such scenarios wherein along with peak high inflations, the stock valuations are also scarily high enough. Higher inflation rate would indirectly suggest at lower demand and higher supply of goods and services, and thereby reducing the profitability.

The above factors are always a danger measuring factors before entering into stock market, however each one of them have some intrinsic flaw. Like in case of GDP nearly 45% of the total country’s population is responsible for agricultural and allied activities (informal sector), on the contrary over 6 crore business establishment are responsible for non-agricultural activities (organized sector). Thus a GDP may not give a clear cut picture as to stock valuations, and other factors may have higher impact than it. Like GDP, Interest rates and inflation, stock market in itself is a separate indicator with regards measuring progress of any country’s economy. However it would be foolish to ignore the above factor in determining the entry or exit from stock market.