Opinion | How retail investors have steadily gained confidence in MF investments

Despite high market volatility in the current FY, investors have shown faith in funds

What comes to your mind when you think about an evolved investor? The maturity level of a retail investor can be broadly defined by three characteristics— investment tenure, asset mix and performance evaluation. I believe, retail investors in India have evolved over the years as is reflected by the changing investment trends in the mutual fund industry. The mutual fund industry has witnessed phenomenal growth in the last few years with the assets under management (AUM) growing almost three times in the last five years. Industry growth is a combination of multiple factors, but increasing awareness about mutual funds has been one of the major drivers.

Over the years, mutual funds have grown from being an alternative to direct equity investment to being recognised as a viable solution for different financial goals. From being focused primarily on equity-oriented schemes, retail investors now have diversified portfolios with investments also including debt-oriented schemes. The retail category has 67% of investor assets held in equity-oriented schemes and 26% in debt-oriented schemes, with the rest in liquid and money market schemes, exchange-traded funds (ETFs) and fund of funds (FoFs).

Besides diversification across asset classes, retail investors have also started understanding and accepting the benefits of long-term investing by staying committed to their investments by investing regularly through systematic investment plans (SIPs). In the past, it has been evident that retail investors were wary of market volatility and were the first to jump ship during such times. However, despite high market volatility in the financial year 2018-19, retail investors have shown faith in mutual funds by remaining committed to their investments. So far in the current financial year, the industry has seen net inflows amounting to 1.32 trillion. This trend can be further substantiated by the continued growth in the industry’s SIP book. The SIP book size has registered a healthy annualized growth in the range of 12-15% per annum in the last four years and now stands at over 8,000 crore for February 2019. Thus, anecdotal evidence underlines the growing confidence of retail investors in funds.

Mutual funds have seen net inflows over the last seven consecutive fiscal, starting from FY13. One could argue, that the markets were on a growth trajectory hence the inflows have been positive. While markets logged gains* in six of the last seven years, FY16 was an odd year, wherein the S&P BSE benchmark index declined 9.4%. Despite the subdued market performance in FY16, the industry recorded 13% growth in net inflows. This is contrary to earlier years where the industry saw net outflows in three of the four fiscal years in line with the equity markets registering losses in two of the four fiscals.

While asset mix and investment horizon hold paramount importance, regular performance evaluation in terms of risk-adjusted returns should not be ignored. Investors tend to get swayed by looking at short-term performance and end up taking hasty decisions, which can come in the way of their long-term goals. Investors need to assess the performance of their investments in line with the risk taken. For example, having higher double-digit return expectations from a balanced or pure debt fund seems like an ideal recipe for disappointment. Imagine anticipating your favourite cricketer to score a 50 or a century in every match. Quite an improbable task, and chances of you getting disappointed are higher. Similarly, at times having unrealistic return expectations lead to wrong investment decisions.

One of the key factors that has helped retail investors’ expectations is the awareness created by fund houses and media alike. The Association of Mutual Funds in India’s Mutual Fund Sahi Hai campaign has had a positive impact. They have started understanding mutual funds and the different benefits offered by this versatile investment option. Overall, we need to see a structural change, wherein every bank account holder becomes a folio holder, and every saver becomes an investor.

In this context, an interesting quote from Warren Buffett comes to mind, “The most important quality for an investor is temperament, not intellect."

*The period considered is FY13 till date; as of February 2019, the S&P BSE Sensex is up nearly 9% for the financial year 2018-19.

Ashwani Bhatia, managing director and CEO, SBI Mutual Fund