Even though the number of asset management companies has gone up in the past five years (50 by the end of 2012; 32 by the end of 2007) and their assets under management have gone up as well (Rs.7.6 trillion, up from Rs.5.5 trillion), somehow investors haven’t quite warmed up to mutual funds (MFs) at the pace we would like. In January 2013, equity MF schemes sold equities worth Rs.4,713 crore (on a net basis; they sold more securities than they bought) in the stock markets. This is the fourth highest net sale of equities by MFs in any month, between January 2000 and now. As per a Mint report published on 6 February, fund houses attribute this significantly to redemptions (around Rs.2,500 crore) that hit equity funds in January. They also claim that money seems to have shifted to debt funds, mainly because of a favourable interest rate scenario that benefits debt funds. Data available from the capital markets regulator, Securities and Exchange Board of India (Sebi), tells us that debt funds bought, on a net basis, Rs.43,804.70 crore of debt securities in January.
Procedural issues, business uncertainty, lack of investor education and lengthy paperwork are typically the main reasons why there is a lot of hesitation in people when it comes to investing in MFs. Is there a way out?
Take the case of one of my colleagues; let us call him AJ. A blasé investor, 39, he did not see the need to invest in any instrument apart from fixed deposits and a few insurance schemes. In February 2011, after much persuasion, I got him to invest in five equity schemes (from Mint50, of course) for him and his wife, one of which was Fidelity Equity Fund. By the end of 2011, equity markets had fallen by 25%. In February 2012—a year after he had invested—Fidelity International announced its decision to sell its Indian MF business. As is the case with Mint50, I suggested him to exit Fidelity, even though he had barely completed a year then and was running a loss.
There was nothing wrong with Fidelity schemes at the time he had invested. A good and sound fund house, Fidelity avoided launching too many schemes, unlike many of its peers, focused on performance and kept investors happy. Its decision to exit the business surprised many. Its investors though had to face an unfortunate decision to either stay invested or exit, even though some may have invested in it just a few months before the exit was announced.
Elsewhere, towards the end of 2011, when most schemes’ three-year systematic investment plan (SIP) returns were in the negative and disgruntled investors started to stop their SIP programmes. A year later, the tide has turned and most SIPs are again in the positive.
What do you do when plans go awry, then? The key is to continue with your investment plan, irrespective of the market uncertainties. So while AJ sold off his investments from Fidelity, the SIP investors who stayed invested in 2011, benefited, as equity markets rose back in 2012.
What’s really tough—and rightly so—are the operational problems when it comes to investing. And here’s where the MF industry has been badly hit. Numerous changes in the know-your-customer (KYC) norms over the past five years have discouraged investors. A Mint report, published earlier this week, analysed in great detail the pains that investors go through getting their KYC done (http://tinyurl.com/d8huetc). Though KYC norms are healthy for the industry and the economy, frequent changes are not.
Take another example. Recently, when I decided to change my bank mandate on an HDFC MF investment I had made in 2002, I had to submit a copy of the old passbook, too, as proof that the old bank account number was indeed mine. What’s worse: even that did not work. Why? Because my old account’s account number has changed twice in the past 10 years because of a change in the Indian banking system in recent times. So I had to dig out a copy of my passbook that the bank had issued me in 2002. Some fund houses such as HDFC Asset Management Co. Ltd mandate old bank passbook copies—in addition to a cancelled cheque copy of the new bank account—if we wish to change the bank account that is tagged with our MF account folio. Else, I had to go to the bank branch and had to get the branch manager to sign a letter certifying that the old account was indeed mine. Again, the intentions are good (to prevent fraudulent change of bank account), but could we devise a simpler way to do things please?
Agreed that the system is complex, but there are ways to overcome some of our investing miseries. We—the investors—must also learn to climb the ladder; self-learning is one of the better ways to navigate a complex system. Markets will remain volatile. Business conditions will always be unpredictable. And in a country like India, we cannot escape paperwork and operational problems. What we can do is to at least aim to learn the basics of investing. Let us start by getting to know simple things about our investments, like what is the difference between a growth and dividend plan of a fund, should we start an SIP or do a lump sum investment, how much money should we start investing now, for instance, we need to make Rs.1 crore in 20 years, how to read our MF account statement and so on.
It has been two years, for instance, since AJ started to invest in MFs but he still hasn’t learnt how to read his account statement. “I don’t know where my money gets invested; perhaps it goes into some black hole,” he huffs and puffs, every time I volunteer to teach him. Now I have stopped reminding him; let him read this and find out.