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Inflows into Equity Mutual Funds at 25-Month Low
Mar 11, 2019

What are the factors that drive stock prices higher?

One of the key factors is earnings growth. When a company delivers robust growth in earnings, the stock price is destined to rise higher.

Another factor that drives stock prices higher is the expectation of higher future earnings. Stock prices rise ahead of earnings, resulting in an expansion of the valuation multiple. In the NSE 500 price-to-earnings multiple chart I presented on Friday, it was apparent that most of the gains over the last five years have come from expansion in valuations in anticipation of higher future earnings.

A third factor that plays a key role in driving stock prices higher is liquidity conditions. If money keeps pouring into the stock markets, stock prices are likely to trend higher.

The key driver of the bull run in 2017 was a flood of domestic liquidity into the Indian stock markets.

The chart of the day shows the inflow of domestic money into equity mutual funds.

You can see the net monthly inflows rising through 2016 and surging to unprecedented highs in 2017. But the inflows slowed in 2018. After October 2018, the inflows into equity mutual funds have been dropping every consecutive month. In fact, in February 2019, the net inflows into equities, including those linked to savings scheme funds, declined to Rs 5,122 crore. That's a 17% drop from January 2019, and a steep 69% plunge from a year ago.

Data source: AMFI

This Chart Of The Day was published in The 5 Minute WrapUp - Will a Modi Victory Pave the Way for the Next Bull Market?

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