PM Modi's black money stroke: Should you worry for your MF, stock investments?

In order to curb black money and tackle fake currencies, Prime Minister Narendra Modi on Tuesday said that current series of Rs 500 and Rs 1000 denomination notes will not be a legal tender anymore. This has created a panic situation among people and a liquidity crunch is likely to ensue as they throng to banks to withdraw money in lower denominations beginning Thursday. 

"Black money and corruption are the biggest obstacles in eradicating poverty," PM Modi had said.

The reason for stopping these two denominations has been the fact that nearly 86% value of all currency in India is stored in Rs 500 and Rs 1000 notes. 

According to a Reuters report, the  growth in 500 and 1,000 rupee banknotes was even steeper; 500 rupee notes grew 76% between 2011 and 2016, while in the same period, 1,000 rupee notes rose by 109%. 

Domestic stock markets, on Wednesday, reacted negatively before compounding their losses as US Presidential elections results came in. 

At one point, BSE Sensex lost nearly 1600 points before recovering nearly 1200 points by the end of trading day. On Thursday, markets have opened in green with over 1% gains. 

But, should you be worried?

Commenting on whether an investor should be worried about losing money, Vidya Bala, Head, Mutual Fund Research, FundsIndia.com, said, "These would all be temporary shake ups and should be looked at from the perspective of the larger good to the economy - curb black money and bring money into the legal system".

Bala, in her report titled 'The move to curb black money and its impact', pointed out that black money caused inflation in the system and reduces money available to banks to do business. 

"More money in the legal system will keep inflation in check, makes banks stronger and also reduce overall taxes. Hence, it is a positive move and any volatility that can be expected over the next few weeks and couple of months should be used to deploy more money," Bala said.

Worry for builders and resale property market

Real Estate sector or 'pool of Black money', will take a major hit. The impact will be for both resale property market and builders. FundsIndia.com, in its report said that, Mutual funds do not have high exposure to real estate stocks and less exposure to real estate through debt funds. Thus, this it may not have a direct impact as compared to individual real estate stocks which will see correction for a while.

"If the real estate market takes any prolonged hit, then lending by NBFCs and banks may see some trouble. This may see equity funds lose a bit as most of them have high exposure to the financial sector. Also, NBFCs held by debt funds may see an impact if their loans to builders are unpaid", Bala said. 

On the other side, this drop in real estate market could drive housing demand.

However, Bala mentioned that there could be a temporary  increase in demand for money and therefore short-term rates - especially for liquid and ultra short-term funds could see a hike.