Long-term investing gaining traction among mutual fund investors

55% retail investors have a holding period of over 2 years, up from 48.7% a year ago

Equity mutual funds (MFs) have proved to be a good source of sticky money for the stock markets. The average holding period for retail investors in equity mutual funds is more than 24 months in 55.3 per cent cases. The proportion improved from 48.7 per cent a year ago. 

The stellar run in stock prices and improved awareness has led to an increase in holding period for investors, say industry players.

The data from the Association of Mutual Funds in India (Amfi) shows of total retail equity assets worth Rs 6.36 trillion, Rs 3.5 trillion remained with investors for over two years. The propensity of small investors to remain invested for a longer tenure is greater than that of high net-worth individuals (HNIs). The Amfi data shows only 47.11 per cent of assets belonging to HNIs have holding periods of more than two years.

“MFs as a means of savings and creating wealth is gaining acceptance. Investors have understood that equity MFs are not short-term products but long-term instruments, typically held for over three years,” said Jimmy Patel, MD and CEO at Quantum AMC.  

The increase in holding period despite a once-in-a-lifetime sell-off in the equities market in March last year is a sign that small investors have matured, say experts.

The markets had corrected over 30 per cent in only a few sessions last year amid fears that the Covid-19 pandemic will roil the economy.  Typically, investors tend to panic and hit the exit button during such times. But, remaining invested proved to be beneficial, given the sharp bounce in the market off the Covid-19 lows.

The data from Value Research shows in the past year, large-cap funds, on an average, have given returns of 62.3 per cent, while mid-cap and small-cap funds have given average returns of 85 per cent and 116 per cent, respectively.

“Investors awareness of the industry has helped them stay focused for the long term,” said Patel.  Over the last few years, the MF industry has created investors awareness programmes, such as the ‘mutual fund sahi hain’ advertisement campaign, which has played a key part in attracting investors into the MF fold.

In the last three financial years — between April 2018 and March 2021 — equity MFs have seen net inflows of Rs 1.69 trillion.

Equity flows, which were negative for most of the last financial year, have turned positive in the past two months. Equity-oriented schemes saw net inflows of Rs 3,437 crore and Rs 9,115 crore in April and March, respectively. In the period between July and February, equity funds had seen net outflows of around Rs 47,000 crore.

Financial planners say the Covid-19 crisis has led to a realisation among investors of disciplined investing benefits.

“The pandemic taught us the importance of saving money. We have come across several investors who have curtailed their expenses in the pandemic and put that money into equities,” said Rushabh Desai, a Mumbai-based MF distributor. 

Systematic investment plans (SIPs) have been a preferred route for retail investors to park their money into the equity funds. Despite net outflows from equity schemes last year, inflows through SIPs stood at Rs 96,000 crore, slightly lower than Rs 1 trillion seen in FY 20. MF industry players feel SIP can be the right way to benefit from India’s structural growth prospects. 

ICICI Direct Research in a note states that the rising momentum in the vaccination drive further contributes to growth in economic activities.

“Mid-cap and small-cap funds are better placed. Earnings growth during a recovery phase will be high in mid-caps and small-caps vis-à-vis large-caps, whereas multiple expansion can further aid additional returns. All-time high levels in absolute terms should not be given higher weighting and focus should remain on long term growth prospects,” said the note.