3 products are changing the market dynamics in the non debt segment in India, and they cannot be ignored:

  • huge sale/missale of SIPs (1.25 crore SIP of an average of 4000Rs. )
  • even bigger sale/missale of ULIP and classic endowment plans
  • rocking growth of funds under PMS

these numbers are huge, real huge and approximately Rs. 10,000 crores from these 3 sources alone are chasing about 125 odd companies. This is the full range of all companies in which fund managers invest. divided it means about Rs. 80 crores per company – not very difficult to understand what such an infusion can do to the price of a particular scrip. Far more importantly this also means that a company’s shares get bought IF THE reputation, the education of the CEO, the contacts,…

NOT NECESSARILY the FCF, RoE, RoCE, Ronw – these are for lesser mortals I guess. ‘

Take a company like Mahindra Holiday Resorts. Impeccable reputation. Head of the Bombay club. Keshub Chairman of Union Carbide, but the man who remained untouched. Mahindra – a company about whom NONE, none of our blue blooded research organisations EVER come out with a ‘sell’ report.

So the number of shares held by mutual funds went up from 37 lakhs in Dec 2015, to 68 Lakhs in Dec.2016. Not bad at all. Unjustified? well, well.

If I were an analyst I could easily create a report saying “good management, play on rising income, increasing size of middle class, more disposable income, good funding arrangement, happy and satisfied customers (ok we both know that is a lie, but so what), increasing business ( referral)…..” so it is a great business and justify the purchase.

It would be wrong that is all.

I just singled out MHRL. Go and do some research. Many companies doing badly can be ‘window-dressed’ to justify. The advantage is that this will ensure that the price NEVER will fall. It just cannot. The smaller the floating stock, the easier to manipulate the share price. We have seen all this in the 1980s and ’90s.

We are the gen which dealt with brokerage houses, research reports, price support, ………..and what have you..

Reliance MF has been holding for more than a year, Hdfc is the new entrant with big buys…are these an indicator that something is going to change? Or is it an indicator that friends are buying shares of companies belonging to friends? I do not know.

Well I could have said that in Mar 2016 also. Let’s see.

See the increase in mutual fund holdings in Hdfc bank, Cholamandalam, Coromandel International, etc. – it is almost impossible for these shares to fall as long as the SIP party goes on. You need to track MF holding in all the shares in your portfolio – and you will suddenly know why the fluctuation in the share price has gone down – look at Cummins, the price may be down, but the volatility is gone.

PS: I trade in MHRL real often. Rarely hold a longish position for too long. I have long term positions in Hdfc bank, Chola, Coro, Cummins,

One more real mega change that is happening is the NPS.

What started off as an Index fund it is now an active management that is set me worrying.

Will the NPS become the next UTI or LIC?

Will the government direct it to buy X shares and sell Y shares. What about promoters doing it themselves.

With such a pathetic index construction, and such a small universe of 130 shares to choose from, we are in for a HIGH times.

Could these mindless SIP and ULIP keep pushing the market higher and higher – reducing expectations and increasing risk ?

Scary. At least I am fearful.

If the ultimate value investor is coming with an IPO, it is not a great signal.

 

  1. So, where does this lead us? I understand that too much of retail money is flowing into market right now, but is not this what we wanted for years? What should an investor do to plan for retirement and children’s education? (25 years, and 12 years to go)

  2. I was always sceptical when you were advocating for SIPs and index funds for the last several months. Just over a fortnight back I was telling a colleague how SIPs, ELSS and NPS are the biggest Ponzi scheme ever, whose ‘returns’ are fuelled only by fresh investment from unsuspecting/gullible salaried class,when the market is overvalued.

    In fact, this is a improved variant of Ponzi scheme in that YOUR OWN investment a year down the line, will inflate your ‘returns’ of what you invest today. Irony, this is.

  3. Kalyanaraman,

    I have done SIPs for the past 16 years and have got superb returns. Your understanding of finance and Ponzi of course must be limited. Shares do not go up because there are more people buying, they go up because the earnings per share go up. Of course the alternative to SIP in mutual funds must be bank RD. I have no clue where you invest. Actually I am amazed that you are visiting this blog!

    Subra is just saying that we may be over doing this – too much of a good thing kinda concept. I am sure you invest in LIC and bank RD and are happy with the 4% p.a. return.

    Or maybe you know better?

  4. The value investor want to capitalize on the greed of the new age investors,so called maverick pundits colluding

  5. Pooja R,

    SIPs are great wealth creators when the market is fairly valued and there is potential for growth. But when the markets r overvalued, lot of investors book profit and stay in the sidelines while fund managers artificially sustain the prices which would have otherwise fallen, with the easy money from gullible salaried class, who will blindly trust the fund houses. This is what my understanding is. I may be wrong, but I will not put my money in SIP this year..

  6. Nem Chandra Singhal

    As the report says, we are seeing big amount in SIP/ULIP/NPS etc. Most of the market participants advocate for it to investors with a long term view in mind. Though beginning at a high of a bull run may see the depreciating return in future whenever the bears take over, the return will be generated, which may be of course sometimes negative. But then the mutual funds or stock markets are not for weak hearted individuals. The risk associated with the capital market had to be borne by its participants, unless the participants are knowledgeable. The choice is yours and the future trend will continue of its own. Either it is to be ridded or be happy in fixed income instruments, which are mostly at the mercy of the Govt. Thanks.

  7. I have always believed fund houses are always slaves of market, and like Subra Sir keep insisting, you need to realize that truth by indexing, but true indexing is 20 years away in India.
    Earnings always must be respected if you want to stay in the market.
    As for Ponzi scheme, well, not really. If that were true, as fund house, you don’t have any strategy/course correction, just take your money and run. What is bloated book (AUM) today will look like lean book 5 years later. I don’t support what AMCs do, but in the long run, they are still pass-throughs. Like they say, it’s still your money!

  8. Hi Subra,

    You may be right, too much money chasing too few stocks and thereby causing bloat in the stock price and NAV of a fund.

    But what are the options left for investors? Returns from some of the investments though safe are low compared to equities. I invest in SIPs regularly and keep adding when the markets are down. I still believe one could at least look for a double-digit return if the investor stays put for more than five years either through lumpsum or SIP.

    The earnings of companies should grow over time when the business expands thereby improving profitability of companies and justifying the valuation.

    It will be interesting to know from you as to what should be done by your readers with regard to investment. When it comes to diversification, which products should be looked at?

    Request you to throw some light on the same.

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