The Reserve Bank of India earlier this week cut the repo rate by 0.25 per cent, and this is expected to further lower interest rates on bank fixed deposits. This low interest rate regime is sure to help borrowers, but investors who rely on fixed income will get a raw deal.
The billion-dollar question is in a low interest rate regime, where to invest for higher returns. When it comes to investing, the first question that comes to mind is: Invest in what? Among all the asset classes, the outlook for the Indian equity market appears strong, given the falling interest rate and its relatively better prospects vs real estate or gold.
Equity is the best-performing asset class in the long term. In other words, the possibility of getting higher returns from equity is much more than any other asset class.
The domestic stock market has witnessed a spectacular rally over the past six months supported by a favourable global environment, low commodity prices and stable macro fundamentals. Last to last week, the domestic market broke all previous records with the Nifty50 crossing the 10,000 mark for the first time on the back of a combination of factors such as good and widespread monsoon, initiatives taken by the government and continued buying by both domestic and foreign investors.
The structural story for India remains pretty strong and the implementation of the country’s largest tax reform, GST, has drawn foreign investors’ interest. Moreover, India’s longstanding parliamentary democracy and liberal economic policies make it a safer place compared with other emerging markets.
Believing in India’s growth story, FPIs have invested Rs 60,954 crore so far this year, while DIIs (mutual fund) have invested approximately Rs 52,972 crore.
Going forward, we will continue to see the active participation of both foreign and domestic players. Eventually, we will see more active participation from retail investors, as they are buying mutual funds actively. This is evident from the data that the number of mutual fund folios grew by over 93 lakh to an all-time high of 5.82 crore at the end of June 2017.
Now many investors have taken the systematic investment plan (SIP) route to invest in equity. Going by Amfi data, retail investors have committed close to Rs 5,000 crore into equity mutual funds every month through SIPs.
Actually, continuous slump in the real estate market, gold prices and fall in fixed deposit rates have led to a surge in mutual fund investment.
The Indian economy has witnessed a paradigm shift since the last decade and it now seems to be on a robust growth trajectory. With a stable annual growth rate, improved fundamentals such as shrinking current account deficit, low inflation and rising foreign exchange reserves, India will continue to remain a bright spot among its peers.
It is expected that domestic market will continue to move higher, supported by a strong macro environment, improvement in earnings growth, pro-growth reforms, and a glut in global liquidity. But investors should invest in equities for the long term and use any 5-10 per cent kind of correction in the short term as a buying opportunity.