Retail investors prune expectations

They are willing to accept 10-12% returns from equities, prepared to remain invested for long term

It seems that retail investors in the equities market are maturing. The steady rise in the monthly systematic investment plan (SIP) inflows, up to Rs 4,500 a month now, is a clear example of that. “About 50 per cent of inflows now come through SIPs. Investors don’t want to worry about getting their timing right when they make a lump-sum investment, and hence opt for SIPs and STPs (systematic transfer plans),” says A Balasubramanian, chief executive officer (CEO), Birla Sun Life Asset Management Company (AMC).

Fund managers and financial planners say that the expectations have also been pruned significantly. “My clientele is willing to accept that long-term return from equities is likely to be in the 10-12 per cent range,” says Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor (RIA).

Earlier, everyone wanted a multi-bagger stock or fund. Now, they are willing to wait for longer periods, even 5-10 years, a significant increase in tenure. Earlier, the average investment period in mutual funds stood at 18 to 20 months. Now it has risen to 36 months or more, says fund managers.

What led to this change? A number of reasons. First, a decline in savings rates, even basic savings deposit rates, are forcing investors to look at more lucrative investment options. For example, most top banks have in the past month reduced their savings deposit rates to 3.5 per cent. Rates of other small savings schemes such as Public Provident Fund, National Savings Certificates and Senior Citizen Savings Schemes have been under pressure for some time now. At the same time, real estate and gold aren’t looking too lucrative either. In addition, the Consumer Price Index-based inflation has been coming down steadily. In July, it stood at 2.36 per cent. Clearly, real returns for investors, even if they earn 10-12 per cent annually, aren’t too bad. 

This has led to a move towards equities, with moderate expectations. “The mutual fund industry has seen consistent inflows into equity funds, dominated by retail investors, since May 2014, barring a small blip in March 2016. Between May 2014 and July 2017 cumulative investment in equity funds has been Rs 2.5 lakh crore, despite bouts of volatility during this period,” says Jiju Vidyadharan, senior director, funds and fixed-income business, CRISIL Research. And as investors are using the SIP route, there is less panic as well. “The number of redemption requests we get when the markets correct has declined in recent years,” says Balasubramanian. 

Manoj Nagpal, chief executive officer, Outlook Asia Capital, says investors displayed strong sectoral biases in the past. Now, they are looking to invest in diversified equity funds and have steered clear of sector funds.

Younger investors are entering  into equities nowadays. Earlier, if the average entrant was in the 40s, those entering the markets now tend to be in the 30-35 age bracket. Investors also tended to borrow to invest in equities during past rallies. Experts say they have not seen much evidence of leveraging this time. 

Better informed: The average direct equity investor is better informed today than 10-20 years ago. “Better regulations mandating listed companies to share information on the exchanges regularly, quarterly conference calls, investor presentations and detailed annual reports have led to better understanding of companies’ operations,” says Jatin Khemani, founder and chief executive officer, Stalwart Advisors, a SEBI-registered independent equity research firm. Vinod M S, head of direct equity, Mitraz Financial Services, says many investors participate in annual general meetings and conference calls held by management. “There is also a realisation that taking professional help is more prudent than dabbling in stocks directly, resulting in more investors signing up with registered investment advisors,” says Vinod. 

A long way to go: Despite the surge in investor interest, India’s mutual fund industry has a long way to go. Penetration in terms of asset size to gross domestic product (GDP) stands at 10 per cent versus the global average of 54 per cent. Retail investors have also not taken to debt funds in a big way, which can serve as an alternative to fixed-income instruments (whose rates are falling). “More than 70 per cent of retail investor money is in equity mutual funds. They should consider hybrid, debt and money market funds also, based on their risk profile and investment horizon,” says Vidyadharan. 

Most investors lack understanding of how debt funds work. “Based on past returns, investors put their money in long-duration funds even though interest rates are closer to the bottom,” says Raghaw.

Investors’ perception of risk has also declined, as it happens in every bull market. “Many investors are ignoring valuations. They are investing in mid-caps and small-caps despite the frothy valuations,” says Nagpal. There seems to be a strong belief that inflows will continue to pour into the equity markets from retail investors and domestic institutional investors (DII), and this will sustain current valuations or take them higher. Nagpal says if earnings don’t revive soon, markets may not keep rising based on P/E (price to earnings) expansion alone.

The concept of SIPs may have been oversold to investors to a point where they think it is a complete antidote to risk in equities. “If you start an SIP when valuations are high, you may earn a good return only if your investment horizon is long. It may not work if you need to withdraw from your corpus within a couple of years, when the markets are down,” says Raghaw. 

Some problems remain: Many direct investors still focus on price rather than valuations. “They get into short-term trading and also become very confident about their ability to predict short-term price movements. They dabble in futures and options, and soon their investing becomes akin to gambling,” says Vinod. 

Many also lack a sound portfolio strategy. Investors need to decide how many stocks they will hold: 10, 25, or 50. They need to understand the trade-off between concentration and diversification. They should also pay heed to position size, and bet big when the odds are in favour. Excessive data flow is another issue. “99 per cent of the data is noise and only 1 per cent is useful. Social media has made matters worse,” says Khemani.

What should you do? Investors’ mettle has not been tested so far this year, with most corrections being small. They will need to hold on to their equity investments when a big 10-15 per cent correction happens. “The combination of investing through SIPs and the growing belief that equities are for the long term may translate into more people sticking around this time,” says Raghaw. Finally, those aged 60 and above should not get caught in the current euphoria about equities and over allocate to this asset class.