Late bloomers

Despite the volatility of recent weeks, and the price drops of recent days, the current financial year has been the year of the stock market.

With the Sensex moving up over 100 per cent from its lows in 2003, it's no wonder that many investors have been able to more than double the value of their investments.

The same goes for the growth schemes of mutual funds, whose net asset values have moved up in tandem with the market index.

Yet the data show that while foreign institutional investors (FIIs) have been lapping up Indian equities, domestic mutual funds have been far more cautious, being net sellers for most of the year.

It's only during the fag end of the rally that local mutual funds have made net purchases, and even then the amounts invested have been small compared to what the FIIs have pumped in.

Data from the Association of Mutual Funds in India do show record inflows into mutual funds, but most of these inflows have gone into debt schemes, rather than into equities.

Income and liquid funds have accounted for as much as 89 per cent of the fresh inflows, in a year in which the performance of the debt funds has been dismal compared to the returns that the equity funds have fetched.

What accounts for this extraordinary lack of foresight? One time-tested market theory is that the retail investor can never time the market, usually buying at the top of a rally. So it's not a surprise that the equity funds started getting substantial inflows only late last year.

This theory would also explain the rush into debt funds in a year when interest rates bottomed out "" those who had missed the bond market rally of the previous two years entered at the top of the market.

So far as liquid funds are concerned, they have become an essential cash management tool for corporates, and inflows into these funds reflect not investment appetite but the excess cash available with companies.

Yet another reason for the lack of net inflows into mutual funds may be that retail investors who had been stuck in these funds for years, caught on the wrong foot by the tech meltdown, lost no time in selling their holdings as soon as the market improved. Rather than miss an opportunity to exit, they preferred to exit early.

However, by far the most important reason for the relatively low inflows into equity funds has been risk aversion on the part of investors.

After losing their money in the Harshad Mehta scam, in vanishing companies during the IPO boom of the mid-nineties, in the Ketan Parekh scam, and finally during the meltdown of the US- 64 scheme, investors are still wary of entering the stock market.

This accounts for their extreme reluctance to invest in equities, on the one hand, and the massive sums being deposited in small savings schemes, on the other.

So much remains to be done by the mutual fund industry to educate investors about the long-term benefits of investing in stocks.