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Roughly one of every two rupees in mutual fund equity schemes was invested after December 2012. The average holding period for only around half of them is greater than two years, show data from the Association of Mutual Funds in India (Amfi). In fact, a quarter of them have an average holding period of six months or less.
A large proportion of this is said to be on account of investors exiting as the markets have risen, as well as possible commission-led churning.
Harsha Viji, managing director, Sundaram Mutual, said investors typically invest in equities with only a two-year view. He said the equity investor’s median holding period was between 18 and 24 months. (Median is the value in the middle in a set of numbers and is considered more accurate than the mean, which can be skewed by large numbers at either end.)
“This is one of the reasons we started launching closed-ended schemes. We found that regardless of how the fund manager is doing, it’s a lottery if the investor is going to be exiting so soon,” he said.
Viji blamed the volatility equity markets had seen since 2008 and noted returns had been limited until last year, which resulted in investors exiting.
Dhirendra Kumar, chief executive of fund tracker Value Research, said it could also be the result of pressure from distributors who were looking to profit from getting investors to exit old schemes and invest in new ones as the bull market picked up. Investments from before the regulatory changes of 2009 had limited trail commission, unlike today. This has created an incentive for distributors to switch their clients from old schemes to those that offer both an upfront commission as well as a higher commission, according to Kumar.
“The churn is beneficial to distributors. Very old investments hardly had trail,” he added.
Ranjeet S Mudholkar, vice-chairman and chief executive of Financial Planning Standards Board India (which had applied for setting up a self-regulatory organisation for distributors), said churning had been a problem in some sections of the distributor community. The larger issue is one of limited investor involvement in investing decisions that allows gives scope for mis-selling, noting that people were often willing to do more research when buying a mobile phone than investments. This unwillingness to educate and involve themselves in the investment process is taken advantage of by unscrupulous elements, he said.
For non-equity schemes, 40-50 per cent have a holding period of six months or less. However, these schemes include short-term debt funds that institutional investors use to temporarily park capital.
An analysis of previous years’ data shows the average age of equity holdings has been falling. In fact, the proportion of people who remain invested for more than two years has shown a declining trend since September 2013. Consequently, the proportion of investors holding on for at least two years has been going down even as the market has been going up. The share of investors holding for more than two years hit a record high of 63.43 per cent in September 2013 in the data set that goes back to March 2009.
Market experts typically ask equity investors to invest with a three-five-year horizon. The idea is while equity investing has typically provided higher returns than other traditional investment avenues, such as fixed deposits, these returns are ‘lumpy’. That is, a long period of low or negative returns may be followed by a period of high returns. This is different from other investments such as fixed deposits, where returns are uniform across periods. Experts say this makes it important for individuals to remain invested in equities for a longer period, so that they are around for the full cycle.
Harshendu Bindal, president, Franklin Templeton Investments India, suggested the exit of older investors could have contributed to the decreasing average. “A lot of people came in at the end (of the previous cycle) and saw an opportunity to exit.” He added the average holding period was likely to rise as the overall effect of these exits weakens.
