Retail investors continue to jump ship

With Sensex around 21k, half a million equity accounts were closed in October

Mutual funds are seeing no respite from the relentless exodus of retail investors from equity schemes, as benchmark indices hover around record levels. In October, the local fund management industry recorded about 550,000 equity account closures, as the BSE Sensex decisively surpassed the much awaited 21,000-mark.

This triggered a net outgo of funds amounting to Rs 3,542 crore, the most since September 2012. During the month, redemption requests forced fund managers to go on a selling spree to the tune of Rs 4,018 crore.

“This is typical retail behaviour. I believe most of these investors might have come during the earlier peaks,” says Vikas Sachdeva, chief executive of Edelweiss Mutual Fund.

As of October 31, the industry had assets under management of Rs 1.73 lakh crore in its equity segment. Fund officials said the underperformance of equities to debt in the last three years is prompting unit holders to redeem on every possible occasion. Most of the redeemed money is either going to bank deposits or the fixed-income products of fund houses. Fixed-income products or deposits are fetching 8.5-10 per cent returns.

Since the peak in 2007-08, the mutual fund industry has lost over 10 million of equity accounts. The fall has been particularly drastic in the last two years — at the beginning of 2012, the industry had 38.4 million equity folios to its credit; now, these stand at 30.6 million.

Jaideep Bhattacharya, chief executive of Baroda Pioneer Mutual Fund, says, “Till the time you do not see a sustainable rally in the market, retail will continue to move out. Investors who entered between 2006 and 2008 quit the minute their investment value is on a par with costs.”

Between 2005 and 2006, growth in the number of equity folios was about 90 per cent, or about eight million. In 2006-07, the industry added another eight million accounts, raising the total to 25.3 million. The sharpest rise was in 2007-08, when a massive 12.4 million new equity accounts were opened, amid roaring markets.

“It’s a classic example of investors booking profits when indices go higher. At one point, selling should be over. But when would that tipping point come is anybody’s guess,” says Dhruva Chatterji, senior investment consultant at Morningstar India

Sector officials say cancellations of systematic investment plans (SIPs) are on the rise. Not long ago, contribution from SIPs was about Rs 1,500 crore a month. “Now, this has dropped to Rs 800-900 crore,” says the chief marketing officer of a large fund house.

Bhattacharya says, “Disciplined monthly investment for three or five years isn’t there anymore. Cancellations before maturity are rising.”

The record redemptions from equity schemes have led to mutual funds introducing close-ended equity schemes with lock-in periods between three and five years.