Fuel Price Cut: Impact on Mutual Fund Investors

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Fuel is a material which is used to produce heat or energy to start fire or to make a machine work. It is impossible to live in today’s world without using them as they have become a key component in survival. Gasoline or petrol and diesel are the fuels that are being used to make a vehicle work. Without this the transportation will come to a standstill, bringing economy in a state of shock. Let’s read what leads to a change in their prices followed by the recent fluctuations.

What Leads to Change in Fuel Prices?

Fuel prices are prone to fluctuations because of many reasons, the main ones are mentioned below:

1. Organization of Petroleum Exporting Companies (OPEC), an association of fourteen countries is a price influencer as it decides the levels of production to meet the demands globally.
2. The change in prices may happen as a result of the supply and demand ratio. As a general fact, whenever the demand exceeds the supply, prices increase, and when the supply is more than the demand, the prices fall.
3. One of the other reasons for this fluctuation can be natural disasters that can lead to changes in the availability of the same.
4. Political situation in the country is yet another reason responsible for fluctuation in the prices.

Why Has the Price of Fuel Reduced Recently?

With the announcement of reduction in the central excise duty by Rs. 1.50 and instructions to further cut in the prices by Rs. 1 to the oil marketing companies by the central government have led to a fall in the oil prices. Many states have cut the applicable VAT as well, leading to an overall reduction falling in the range of Rs. 2.50 to 5 across the country.

What Changes Are Expected from This Reduction?

There are a number of changes which are expected to occur as a result of this change in the oil price which are as follows:

1. This price cut is likely to create a depreciation in the income of central government by Rs. 10,500 crores approximately. This will further increase the fiscal deficit which is considered as a positive sign by some economists.
2. Reduction in oil price may finally bring down the inflation rate by 7 to 8 basis points, thus bringing relief in the market.
3. The fall in this price will further increase the purchasing power of people leading to an increase in liquidity in the market.
4. It is a good news for companies that use fuel as an input, thus decreasing their production costs.

What Oil And Gas Sector Holds for Mutual Fund Investors?

It may be said that there will be an increase in the purchasing power of people because of this cost cut. This might increase their inclination towards investment and may bring inflow of the surplus money in mutual funds. Apart from this reduction, below are the points which show how oil and gas sector is estimated to perform in future.

1. India, a developing country is going through a growth phase where its global energy demand is expected to reach 11% by 2040 from 5.58% in 2017.
2. The crude oil consumption is estimated to reach 500 million tonnes by the year 2040 at a rate of 3.60%.
3. The natural gas consumption is anticipated to increase at a rate of 4.31% CAGR to reach 143.08 million tonnes by 2040 which was earlier 54.20 tonnes in the year 2017.

Increase in consumption will lead to growth of this industry, further appreciating the value of its stocks. Investors may invest in mutual funds that have the assets inclined towards this sector. Some of these schemes are Motilal Oswal Multi Cap Fund, HDFC Top 100 Fund, Reliance Large Cap Fund, and Mirae Assets India Equity Fund.

The Final Note

Although the recent reduction in the fuel prices may appear as a positive sign, it should only be taken as one side of the coin. For a short term period, this change is definitely a positive one, but the future will only reveal what lies in store for the Indian citizens. Talking about the sector’s growth, it is likely to perform well in the coming time. Investors may invest in such mutual fund schemes which have a part of their assets allocated in this sector via MySIPonline. For further guidance feel free to contact our experts and in case you have any query related to regular funds, you can post the same here.

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