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The year Indians swore faith to mutual funds

Nearly 55% of the retail equity MF holdings as of September 2021 had stayed in the market for more than two years, shows latest available data.Premium
Nearly 55% of the retail equity MF holdings as of September 2021 had stayed in the market for more than two years, shows latest available data.

  • Nearly 55% of the retail equity MF holdings as of September 2021 had stayed in the market for more than two years, as compared to 47% in September 2019. Strong market returns over the past one year have drawn investors to mutual funds, though some near-term volatility cannot be ruled out

Patience pays, and more and more retail investors like you and me seem to be following this mantra now. The practice of staying invested in equity mutual funds (MFs) for more than two years has become more cemented during the pandemic, data suggests. So much so that retail investors are holding onto their nerves even amidst a wobbly stock market of late.

Nearly 55% of the retail equity MF holdings as of September 2021 had stayed in the market for more than two years, shows latest available data from Association of Mutual Funds in India. This is a considerable improvement from a 46.7% share in September 2019. The share for high-net-worth individuals has also risen sharply from 32% in September 2019. Even after a dip of late, it was 43% in September 2021.

Sahil Kapoor, head of products and market strategist at DSP Mutual Fund, attributed this to a combination of factors. “One, with the rise in the market, the assets under management (AUM) would have itself increased without even more participation," he said. “Second is the lack of attractiveness of alternative assets."

The discipline has helped investors excellent returns amidst the surging markets since 2020. All the equity scheme categories have given a double-digit return in the last two to three years, with some delivering up to an annualized 40%. “Investors need to acknowledge that equity investing is a long-term approach, there will be periods of superlative returns which could be followed by periods of flattish or volatile markets," said Kavitha Krishnan, senior research analyst, Morningstar India.

Small is powerful

With more retail involvement, systematic investment plans (SIPs) have grown in popularity. Their share in the industry’s AUM has grown from 12.6% to 14.6% over the last year. The monthly SIP book has been touching new highs, with a record contribution of 11,005 crore in November.

An average 2 million new SIP accounts were created per month in 2021, against 0.9 million in 2018-2020. “Expanded reach, proactive efforts from AMCs (asset management companies) as well as distributors, and convenience offered by the new-age fintech companies are only going to drive this further," said Sumit Agrawal, vice president – equity, IDFC AMC.

However, the average SIP ticket size, which used to be around 2,900 before the pandemic, has shrunk to 2,300 over the last few months. Analysts expect some near-term fluctuations before the ticket size picks up meaningfully.

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Sturdy flows

Healthy SIP contributions by individual investors reflect in other metrics too. Closure ratios, measured as SIPs stopped as a share of fresh SIPs registered, have declined to almost half the peak of May 2020. Steady contributions have ensured robust net inflows into equity schemes for the past nine months. Despite intermittent corrections in the markets, net flows remained positive in November, climbing a four-month high, backed by lower redemptions.

However, the recent phase of consolidation, triggered by increasingly hawkish central banks and consistent selling by foreign portfolio investors, could increase volatility in 2022, and this could seep into investor sentiment.

“Given the inflation risks ahead, we may not be certain about the timing but the direction of rates decision is mostly clear, be it by the Fed or even domestically," Agrawal said.

Undying frenzy

Nevertheless, strong capital market gains over the past year have also bucked up investors to dabble more in stocks directly. Retail shareholding in BSE 500 stocks jumped from 6.4% in September 2020 to 7.4% in September 2021. The number of demat accounts has already increased by a record 18.7 million in the first seven months of this fiscal, shows SEBI data.

Krishnan attributed the recent traction in the markets to more household savings due to less spending during the lockdowns. “As consumption picks up, people are looking at avenues to invest their savings across multiple avenues, stock markets being amongst them," she said.

While investors have remained invested and increased their holdings, experts believe there is still room for improvement. Despite strong growth, the penetration of mutual funds remains low in India. While it is progressing well on cost and transparency, Kapoor said there was a need for the industry to approach the addressable markets, while ensuring financial education to expand reach.

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