Equity investors continue to shun MFs

In FY13 till date, 3.4 million folios closed

Net outflows from mutual fund equity schemes may have returned to a “normal” cycle in October but the pace of investors’ exodus from the category is certainly abnormal, leaving fund managers clueless.

Despite having relatively lower outflows, close to half-a-million equity folios were closed in October — the third month of massive closures in a row. This has shocked sector officials who had been optimistic about equity investors’ base.

When net outflows from equity schemes dropped over 40 per cent in October to Rs 2,000 crore against the immediate previous month, fund managers were a bit relieved. A top official had said in a lighter note that the sector was back to "normal redemption” after witnessing an aberration in September.

True. Higher outflows have been hitting the mutual fund sector for over two years now on a consistent basis. When fund outflows show even the slight downward trend, it brings cheer to the sector's officials. September was an outstanding month as it saw a two-year-high in outflows from the equity segment at Rs 3,500 crore

“In isolation, it could be good as investors are booking profits but overall for the industry it does not spell good,” says Karan Datta, national sales head at Axis Mutual Fund.

With the latest exodus of equity investors, overall decline in equity folios so far this year stands at a massive 3.4 million. This, precisely, means that in a year when the benchmark indices gained over 20 per cent year-to-date, fund houses have been losing 11,234 equity folios a day — the fastest erosion since data has been available.

Sector officials are hard pressed to find explanations for the high rate of closures, despite a flat market in October.

Srinivas Jain, chief marketing officer at SBI Mutual Fund, says, “The industry is losing folios every month amid continuous outflows. However, this time there is no corelation (between the markets movements and folio closures)."

According to fund managers, rampant equity folio closures are understandable when markets rally steeply, as was the case in September when lots of cancellations and terminations happened. But when the markets go nowhere, it’s a difficult to ascertain reasons behind investors’ exit from equity investments, they add.

The sector will take a while to return to normal, adds Jain. “A good market rally is required for investors to come in,” he adds.

“I assume, investors who could not get out in September chose to close their accounts and move out in October,” explains Dhruva Chatterji, senior research analyst at Morningstar India.

As on October 31, the assets under management of the industry stood at Rs 7.68 lakh crore. Of this, equity assets constituted 24 per cent at Rs 1.84 lakh crore.