Mutual funds have been piggy-backing on the strong bull-run in the equity market. The value of mutual funds that is measured in net asset values (NAV), is soaring, with about 80 per cent of equity-oriented mutual funds recording their all-time high NAVs last week. Of the 353 open-ended equity-oriented funds, 285 recorded new lifetime high NAVs.
Both foreign and domestic investors have been pouring money into mutual funds. Retail participation through systematic investment plans (SIPs) is also on the rise. According to AMFI, the total amount collected through SIPs in February 2017 amounted to ₹4,050 crore. Significant inflows into other exchange-traded funds (ETFs) through investments by the Employees Provident Fund Organisation (EPFO) and the provident funds of PSUs also contributed to the market rally. The Central Public Sector Enterprises ETF has raised ₹6,000 crore in recent times.
Across the board
The rally in fund NAVs was across the board, spanning many equity mutual fund categories. However, pharma and technology funds lagged following the under-performance of stocks in these sectors. Pharma stocks were under pressure because of concerns over regulatory tightening and action by the US regulator while most IT services companies underperformed owing to the fall in global demand and pricing pressure.
Among the sub-categories in equity diversified funds, all schemes from the small-cap category and 93 per cent of multi-cap schemes crossed their historical highs. All the dividend yield and index funds touched life-time highs while among sector funds, energy, services and media raced ahead.
What does it mean for investors?
Many investors think this is the right time to exit/redeem funds. Since stock prices typically reverse when they reach life-time peaks, there is a fear that funds may also do likewise.
But this is not a good idea. There are various reasons why one should not consider NAVs while entering or exiting mutual funds.
One, it is wrong to equate mutual funds with stocks. While it is alright to exit a stock when the price is high and enter when the price is low, the rules are different for mutual funds. Stock prices have individual histories, with historic highs and lows that are useful for timing the buys and sells. But mutual funds are made up of a bunch of securities and the composition of funds also keeps changing over time. So the history of fund NAVs is not always a good criteria for MF selection.
Evaluate risk accurately
Two, while stock valuation is done by looking at the stock’s fundamental prospects and its valuation, a similar gauge cannot be applied to mutual funds. For a mutual fund scheme is not a single asset but a portfolio of different stocks and assets. So the high NAVs do not accurately depict the prospect of the basket of securities; the value could have been influenced by a few stocks in the portfolio.
Three, it is pertinent to note that the NAV is not a performance indicator. Funds can be evaluated based on comparative analysis (comparing the NAVs of schemes on different dates), or by comparing the growth in the NAV to the returns of the fund’s benchmark or the category average over the same period. Also, the inherent risk in the fund has to be evaluated before zeroing on the right mutual fund.