Monday, May 26, 2014

Equity Mutual Funds – Should you stay invested, or Sell out?

Download Tax Saving Mutual Fund Application Forms

Invest In Tax Saving Mutual Funds Online

Buy Gold Mutual Funds

Leave a missed Call on

94 8300 8300

 

As equity markets hit new highs, one question that seems to be on top of all investors' minds is whether one should stay invested, or book profit. Given the roller coaster ride of the past 6 years, this is an important question.

In this article, we analyse the factors contributing to market movements and provide a historical context so you can take an informed decision.

What drives markets?
At a very basic level, the return that investors make from equity markets is driven by 2 factors.

  • Growth in profits (earnings) of companies. This is reflected in the Earning Per Share (EPS) of the company.
  • The value which investors assign to these earnings. This valuation is reflected in the Price to Earnings multiple (P/E) of the stock.

For the purpose of the analysis that follows, we've used the annual Sensex EPS and P/E data starting 1991 published by the Bombay Stock Exchange. Sensex EPS represents the collective earnings of the 30 companies that make up the Sensex. Similarly Sensex P/E represents the collective valuation of the same 30 companies.

Is the market over valued?

To understand this, let's see how valuations have varied historically.

Historically, the Sensex P/E has a median value of 18.1. Since the Sensex does not stay flat during the year, we should also look at the highs and lows. The Median P/E at high is 21.5 and Median P/E at low is 13.6x. In some years it can be higher than the P/E of 21.5 and in some year lower than 13.6x, whereas the median observation normalises the same.

In other words, historical P/E valuation has a median value of 18.1 with a low of 13.6 and high of 21.5. To understand this better, here's the valuation of the Sensex at similar levels.

January 2008: Sensex was 21,200 and a P/E of 28x
November 2010: Sensex once again reached 21,005 with a P/E of 22x
Now: Sensex is close to 22400, P/E is 18.3x

You would notice that although the 3 observations over 6 years are at almost the same Sensex level, the valuation has come down from a peak of 28x to 18x. While the Sensex may be at a high, the valuations are about average. If one considers 2015 earnings, the Sensex P/E of 16x is actually lower than average.

Are company profits growing?
Over the past 5 years, the average revenue of the companies in the Sensex, have been growing at 17.8% per annum and earnings at close to 11.6%. The lower growth in earnings is a result of margin pressure faced by companies due to general economic weakness. This usually follows economic cycles. As and when the economy improves, margins tend to catch up and profits grow faster than revenue.

The current EPS of the Sensex is 1222, which is expected to grow by approx. 15% to 1400 by FY2015 (March 2015).

What could an equity investor conclude from above?

1. Though revenue growth has been strong, earnings growth has not kept pace. As and when economic growth improves, earnings growth for companies should be strong.
2. Equity markets valuation is at 16x FY2015, which is near the lower end of the historical P/E range of 13.6x – 21.5x.
3. As the economy improves, investors can expect equity market returns to be led by a combination of valuation improvement and a stronger earnings growth.
4. Even if the economy takes time to improve, since valuations are low, down side risk to equity market returns is limited.

What's our recommendation?

Given this above context, we recommend that you stay invested in equities, and enjoy the ride as and when the economy picks up – conditions for which are falling into place.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund

2.Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

0 comments: