Investors in equity mutual funds rush the other way

Investors in equity mutual funds rush the other way

Mumbai: The stock markets may be on the way up but retail investors in equity mutual fund schemes are pulling out their money, catching the Rs8 trillion domestic asset management industry by surprise.

Vipin Pandey, a 29-year-old software engineer based in Noida, is one of those heading for the exit, selling the last of his equity mutual fund units.

“At last I am making some profit on them, so it’s time to sell," he said. “I don’t expect the markets to rise more." Pandey, like many others, invested in mutual fund units in the latter part of 2007, when the stock market was nearing its peak in the previous bull run.

“Many of them (mutual fund subscribers) were first-time investors," said Dhirendra Kumar, CEO of ValueResearch, a New Delhi-based mutual fund tracker. “After that the market went into a tailspin. They are breaking even now and running away."

These investors, at least three-fourths of them first-time buyers, according to industry estimates, saw savings drop by more than half in 2008 as stock markets crashed amid the global financial crisis.

Between August and October, equity schemes saw net outflows (the difference between purchase and redemption of mutual fund units) of Rs4,600 crore, after the Sensex, India’s most watched equity index, gained 95% since its March low. While data for November has not been released by the Association of Mutual Funds in India, four of the top five asset management companies indicated that there were net outflows in that month too.

Also Read | Small investors’ market share is getting smaller

Buy and not hold for long is the new investor philosophy

This is in stark contrast to previous bull runs during which retail investors rushed to pump in more money with every new high. In January 2008, for instance, when the Sensex reached its lifetime high of 21,206.77, there were net inflows of Rs12,717 crore in equity schemes, the highest in at least five years. In the 1992 bull run, investors bought Rs4,700 crore worth of UTI Mastergain units.

“Lots of people are booking profits because they came in at similar levels about a year and a half back," said UTI Asset Management Co. Ltd chief marketing officer Jaideep Bhattacharya.

The ban on entry fees isn’t helping the mutual fund industry.

“It seems to be strange because, based on market performance, people should be putting in money," said Sukumar Rajah, chief investment officer at Franklin Templeton Investments. “This could be attributed to two factors—outflows due to investors locking in gains after the sharp rise in 2009 and the fact that fresh inflows have been impacted by the recent ban on entry loads."

The Securities and Exchange Board of India, the market regulator, banned fund houses from charging investors an upfront fee, typically of 2.25%, known as the entry load, from 1 August. This became a disincentive for mutual fund distributors to push products because of lower or no commissions. Inflows in August-October averaged Rs4,100 crore compared with monthly takings of Rs6,600 crore in the previous three months.

Also, after reaching 17,000 levels by 30 September, the Sensex has largely traded in the 15,400-17,200 range in October and November, leading people to believe that the days of sharp gains were over.

The pessimism of retail investors is in contrast to the bullishness of foreign institutional investors, who expect Indian markets to rise in 2010 based on indicators such as a 7.9% second quarter economic growth surge and a rebound in company earnings.

Despite downside risks such as inflation and a possible interest rate hike, brokerages such as Credit Suisse and BNP Paribas continue to be overweight on Indian stocks and target at least a 15% rise in the Sensex from current levels of 17,000.

Ashwin Ramarathinam contributed to this story.