Equity MFs: Retail investors jump ship on the high seas

Segment lost over half a million accounts in September once Sensex reached 20k; investors fed up with meagre returns

The Sensex’s crossing of the 20,000-mark means nightmares for mutual fund (MF) officials.

This is because redemptions by investors from equity schemes are higher than average when the benchmark index stays above this level. A Business Standard study shows equity folio closures in 2013 so far have been elevated in the months when the Sensex has crossed this psychological level.

In September, investors closed almost 508,000 folios as the Sensex touched 20,739. In May, investors closed 699,000 folios when the index touched 20,448.  

MF officials said investors identify the 20,000-mark as a trigger point to sell their holdings because it is closer to the all-time high of 21,078 in January 2008. Concerns that Sensex gains would be capped at these levels and the fact that investors had made hardly any money on their investments in recent years might be impelling investors to pull out when the index touches this level.

“The situation is grim. How long can investors wait?” says the marketing officer of one of the top five fund houses.

Not long before, H N Sinor, chief executive officer (CEO) of the Association of Mutual Funds in India (Amfi), had termed less than 100,000 monthly reductions in equity folios a “trend reversal”. In August, only 63,000 equity folios were closed, the lowest since December 2011. He’d said this should sustain, as investors were coming back to equities, with confidence reviving in the market.

Sinor was not alone in thinking so. Several other sector executives felt investors were looking again at equities. How clueless the segment was can be gauged from the fact that within a month, investors had pressed the exit button hard yet again. So far this financial year (April-September), the MF sector has seen closure of a little over two million equity folios — a little over 11,000 every day.

Looking back, investors gave enough time to the sector to manage their funds. Now, they’re taking their money back whenever the value nears closer to their costs. They’re finding other avenues to park their hard-earned money, where they can at least get an assured post-tax return of eight to 10 per cent. The reality is that investors are not making money while being invested in MFs.

G Pradeepkumar, CEO of Union KBC MF, said: “Investors have not made money in MFs as the markets remained weak. The only way to attract them is by making money for them.” He was talking to Business Standard recently at the launch of a new fund.

In sum, over the past year, whenever the markets have come near the 20,000 mark on the Sensex, investors rush in herds to redeem their invested sum. During 2005-2008, fund houses were telling investors to invest with at least a three-year horizon. It hasn’t worked; hence, the legitimate question of how long is the long term.

At the same time as investors have failed to make money, the profitability of fund houses has surged. A Business Standard report suggests the MF sector’s profitability is set to hit a three-year high and revenues to touch a five-year high. Half the segment is in losses but not for at least the top 10 fund houses, which capture most investors. These top 10 have been minting money for years.

Will they bother whether investors make money or not as long as their profitability is on the rise?