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If the political excitement makes investors commit to equity investments, then that’s very good news

As the Narendra Modi government settles in, it’s becoming clear that the equity markets are now in the midst of a sustained rally. This doesn’t look like a few days or hours’ worth of knee jerk reacti

As the Narendra Modi government settles in, it’s becoming clear that the equity markets are now in the midst of a sustained rally. This doesn’t look like a few days or hours’ worth of knee jerk reaction anymore. While the fundamental justifiability of the new stock boom is something that will take months or even years to become unarguably clear, there is no doubt that some revival of animal spirits of equity investors. This holds promise, and like all promises, a certain risk and a threat.

While the revival of spirits is most easily discernible amongst FIIs, it’s there in other segments as well. The most interesting is the data for the month of May for equity mutual funds. Fresh investments into equity mutual funds were Rs 9,999 crore. This is actually the second highest monthly inflow ever into mutual funds. The highest was Rs XXXXX in February ‘08. May’s number is double that of the previous month and three times that of May 2013. Of course, this is just the inflow. When balanced against the outflow (redemptions of the last month, the net inflow is Rs about 2,500 crore. That’s a lot lower than the inflow figure, but is in fact a quite high compared to recent years.

It’s quite clear that equity mutual fund investors have begun to get interested again. I can also see wide anecdotal evidence for this. I know a large mutual fund distributor who specialises in operating in the backwoods of investments in the eastern part of the country. He called me a couple of days ago and told me of the sudden increase in investor interest just in the last few days. I can see something similar in the volume of mail that we are getting at Value Research Online and most strongly, in the usage volume and pattern of the website. Long dormant investors have woken up and have either started investing again, or have at least started actively gathering information and preparing to invest.

That’s good news, but only sort of. For long, the bane of Indian mutual fund investing has been that a large proportion of investors get interested only when the markets go up. As the markets go higher and higher, more and more investors start investing. During the stagnation of the last five years, the investors who still remained interested were quite willing to listen to sensible advice about diversification and sustained steady investments. That’s no longer true. Suddenly, in a matter of days, investors have started asking for the most exciting and happening sectors and themes.

Of course, the reason is that the excitement is being delivered in large amounts in specific parts of the equities markets. Over the month past, infrastructure funds are up and average of 29 per cent, with more than ten funds above 30 per cent. Mid-cap funds are up by an average of 20 per cent, with about 15 funds above 25 per cent. It’s enough to make many investors’ mouth water. All those lessons about diversification and slow-and-steady SIPs are fading from their minds as the prospect of huge, rapid gains clouds their judgements.

Of course, this happens in any market once it starts strongly upward. However, this time, the attendant narrative of the moribund UPA giving way to the dynamism of a Modi-led NDA has given a completely different dimension to this phenomenon. Earlier, it was “I just noticed that a bull run has been going on so I think I should invest”. This time, it’s “The long-awaited Modi bull run has begun on schedule so let me invest before it gets too far.”

It’s sounds dangerous, but who knows. Perhaps the Modi factor will mean that people will actually invest more at an early phase and therefore have a better time of it eventually. If you are one of the crowd, do yourself a favour. Don’t get taken in with stories of hot sectors and themes. Choose some steady, widely diversified equity funds and invest steadily through SIPs.