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Mutual Funds: The Market Is Not Different This Time Dear Investor, But Are You?

BloombergQuintOpinion

The writing is on the wall.

To borrow from the advertisement – Mutual Funds are sahi, yes, but short term gyrations in returns are causing retail investors to back off, as two data points show.

First, February net inflows into equity schemes (Equity+ELSS) are the lowest since July 2016. But more stark is the pace at which the fall in net inflows has happened. Total equity flows have dropped by more than half in just one quarter – from over Rs 12,000 crore in October 2018 to Rs 5,122 crore in February.

This fall is despite an average monthly collection of Rs 7,000-8,000 crore via Systematic Investment Plans in the last 11 months.

Maybe outflows from balanced funds are to blame. More on the reasons later but there’s no denying the message in the net numbers – that this time is not different, and investors are starting to get disenchanted.

Mutual Funds: The Market Is Not Different This Time Dear Investor, But Are You?

Weak Spots

The February data of a total net flow of Rs 5,122 crore is a 16.8 percent decline over January. It’s also the fourth straight monthly decline and the lowest number in more than two years.

And while average SIP flows—the backbone of the surge of domestic savings into mutual funds—have not yet witnessed any dramatic change, there are chinks in that armour.

SIP Registrations

Data available with the Association of Mutual Funds in India suggests the number of new SIPs registered has been waning. The number appears particularly weak for the months of November and December, where new SIPs registered in have come down to 7.58 lakh accounts and 7.23 lakh accounts, from an average of over 10.05 lakh accounts for the first seven months of financial year 2019.

One reason could very well be the equity market performance, which has been lacklustre for nearly 13 months now. But the other is a new hurdle in the verification process. The Aadhaar based Know Your Customer verification was simple to implement for asset management companies, brokers and customers.

Conversations with brokers suggest their customer acquisition run-rate has declined as registrations via the direct, online route, through digital payment platforms such as Mobikwik and Paytm, have slowed.

Discontinued SIP Accounts


But more worrisome than that is the increase in discontinued SIP accounts – at 5.36 lakh units in December versus the preceding eight-month average of 4.66 lakh accounts.

Some market experts explain that by saying amateur, weaker investors are getting out which shouldn’t be cause for concern.

Really?

It is the shift of such investors from vanilla, low-risk savings products, such as fixed deposits, to equity mutual funds that has cheered the industry these past 2-3 years. Aren’t these just the investors that funds want to keep, atleast till they see the benefits of systematic investments over a longer period of time?

There are two arguments I’ve heard in the last few days.

One, that even if SIP registrations were lower in December, flows in January and the February have remained robust. Well, the point being missed here is that a discontinued SIP may take a month or more to show up in the data. And yes, there is a high probability that when the investor stops the SIP, he won’t keep the money with the fund but withdraw the entire corpus instead.

The other argument hinges on the data I shared right on top – that, at the current average Rs 8,000 crore, monthly SIP inflows are over 1.5 times the average 20 months ago (Rs 4,800 crore). A marginal slowdown in flows, at a time when markets have given negative returns for one whole year, is no cause for alarm.

Also read: Large-Cap Mutual Funds: Big Inflows, Small Returns

What Happens Next?

The main question—if SIP flows continue to decline—is that a sign of temporary market-led nervousness or a deeper disappointment that’s prompting investors to turn away from mutual fund investments?

More than time, performance will tell.

Of the better performing mid- and small-cap schemes, only one has shown a gain in 2018.

Midcap and smallcap funds have had a tough time and poor returns may only lead to more outflows. After all, few investors have the stomach to see investments decline over a year.

I had hoped that in this new gold rush – investors would have come prepared with a few learnings from the past. Better picking of funds based on past performance and the gumption to hold on to those investments for a longer tenure, even if the ride hits temporary turbulence.

After all history shows that most times short-term negative returns need not translate into long-term negative returns as well.

For instance, the DSP Small Cap Fund, one of the worst performing equity funds of 2018, has done better over a 10-year period than the three top performers of 2018.

That may not necessarily be true for all funds over 10-years, but the point is worth noting. After all the warning—past performance is no guarantee of future results—cuts both ways.

The market is not different this time dear investor, but are you?

Niraj Shah is Markets Editor at BloombergQuint.