It’s no secret that assets under management (AUM) for equity funds have declined in the last one year. According to data from the Association of Mutual Funds in India, the mutual fund (MF) industry body, for this financial year till 31 October, equity MFs have seen net outflow of Rs.8,065 crore. This compares poorly with the net inflow of around Rs.3,300 crore for the same period a year ago. Remember that after the recent rally, markets have delivered positive returns in the last one year.
Karvy Private Wealth released its third edition of the India Wealth Report last week, which estimates that Indian individuals’ wealth will double in the next four years. But at 29% equity won’t be a big contributor. As per their estimates, FY17 at least 71% of individual wealth in financial assets will be distributed in securities other than direct equity and equity MFs. This compares with around 73% in FY12.
Does this mean Indians are averse to risk from equities?
Indians still don’t prefer investing in equities...
As per the Karvy Wealth Report, in FY11 Indian individuals invested nearly 30% in direct equity, which fell to 25.4% in FY12. So this means, despite attractive valuations, individuals prefer not just to stay away, but reallocate to assets they consider safer. Suresh Sadagopan, a Mumbai-based financial planner explains, “A lot of it is driven by fear and uncertainty. Investors have had a bad experience in the recent years and are fearful that it will carry on like this.” He adds that people wait to make some returns and then cash out as soon as the equity market begins its recovery.
Where equities are concerned, the Indian individual is a fair weather friend. Sample this: in FY07 and FY08, when markets were rallying, equity MFs got record inflows of Rs.22,000 crore and Rs.40,000 crore, respectively. This has fallen to Rs.264 crore net inflow in FY12. Even though the industry had to deal with the abolition of entry load in the period after FY09, experts say that if markets had rallied in that period, the inflows may have come regardless of the entry loan ban. Sadagopan attributes it to greed; according to him, for the first 15-20% of a market recovery, investors just book profits from the earlier investment that was giving poor returns. As the rally continues for another 10% upside, people decide it’s time to enter; but by then it may be too late.
The Karvy report estimates that by FY17 direct equity will be around 29% of the overall wealth of an Indian individual. Says Hrishikesh Parandekar, group head (broking, wealth management and asset management), Karvy Group, “An assumption that markets will rise in the years to come is inbuilt in the projections for direct equity allocation.” He also says the projections include the fact that with markets gaining, the value of existing stocks will also rise along with new inflows.
...They would rather go for safety in returns
Traditionally, having a roof over your head or owning a home is considered the foremost priority in Indian households. Even if the investment doesn’t give a very high return, at least you have a tangible asset to show for it. But is that a good enough reason to get carried away?
Sundeep Sikka, chief executive officer, Reliance Capital Asset Management Ltd, who was part of a panel in the Morningstar Investor Conference held last week in Mumbai, gave an example during the conference of how people rejoice absolute returns from real estate after 15-20 years, but compounded annual returns compare poorly with equity.
Moreover, as Sadagopan pointed out, there are other costs such as maintenance, registration and stamp duty in case of real estate purchases.
Another aspect is buying gold; Indians don’t need an excuse to load up on gold. India is the world’s largest consumer of gold, even though it has to import nearly all its demand.
Finally, the culprits that keep money away from risk assets are bank deposits and insurance. According to the Karvy report, insurance as a part of an individual’s portfolio, increased from 17.5% in FY11 to 19.7% in FY12 and bank deposits form 25% of overall wealth. The idea of investing in an asset where you can calculate a sure return beforehand seems to work well. At present one year bank deposits are earning anywhere between 8.5% and 9% per annum, if you are in the highest tax bracket that means a post-tax return of 6.2%. A savings account in Yes Bank will give 7%, so really this isn’t the most effective investment for your surplus cash. Even for an individual in a 10% tax bracket the post-tax return on a 9% per annum deposit works out to just over 8%, which isn’t much. But, what works is that, unlike equity, the return is known in advance.
What should you do?
The way to make returns above inflation in the long run is to invest in equity. Historically, in the last 20 years, average 1-year rolling returns from equity (benchmark returns for Sensex) is 11.2% and if we look at the last 10 years, this average is 17.35%; this doesn’t include the dividends and the returns are tax free. There is no reason to believe that things will be different in the next 10 years. Investing in a fixed income product which gives you a return less than the rate of inflation only means you are earning negative return.
As far as the gold asset class is concerned, one has to emphasise again, it is a non-productive asset that pays no interest or dividend.