Mutual funds are steadily falling out of favour among investors if the recent data is anything to go by.
Despite a strong rally in the market, investors have pulled out money from mutual funds for the seventh straight month in January. According to the recent data by Association of Mutual Funds in India (Amfi), equity mutual funds have witnessed net outflows of Rs 9,253 crore last month, taking the total outflows to Rs 42,200 crore since July.
While the pace of outflows has peaked since November, when investors had redeemed investments worth Rs 12,917 crore, the phenomenon continues on Dalal Street. This is when BSE barometer Sensex has rallied 32 per cent between July 2020 and January 2021.
Some might argue that a sharp rally in the markets is what has persuaded investors to take money off the table and re-enter at a more opportune time, but analysts don't believe the reason to be this straight forward.
Here's what else they believe is behind the massive outflow in the equity mutual funds:
1. Poor performance by mutual funds
Analysts believe lack of a decent performance by mutual funds over the last 3-4 years is one crucial factor why investors are fleeing from equity funds.
"Mutual funds in the past few years have not performed well, be it fund specific reasons or due to the market conditions. At the end of the day, investors have not made money. So, it is quite natural that when you start seeing profits you start exiting," said Ambareesh Baliga, an independent market expert.
An analysis of the top-performing large-cap mutual fund shows that they have delivered returns between 14-18 per cent over the past five years and 8-17 per cent over the past three years. Barring two large-cap funds - Axis Bluechip and Canara Robeco, most of them have underperformed the market as Nifty50 has delivered CAGR returns of 15.67 per cent on a five-year basis and 13.06 per cent on a three-year basis. This underperformance in funds comes despite a sharp rebound in the market.
2. Lure of direct investing
While the coronavirus pandemic-led lockdown hurt the markets badly, many retail investors saw it as an opportunity to use the time to study the stocks and invest. Between January 2020 and January 2021, a total of 1.06 crore new Demat accounts have become operational, shows data available with CDSL.
Now, Baliga believes that many of these new Demat accounts would have also belonged to investors that put money in mutual funds in the past. He said since most investors have made good money in the past few months as the market has been a one-way street, it is very much possible that they would have withdrawn their investments from mutual funds and invested directly in the markets.
Gaurang Shah, Vice President of Geojit Financial Services, however, cautioned that investors should only invest in good companies in order to make money. He added that if investors are not willing to put in the time to study and invest, then mutual fund SIPs are the best option for small retail investors.
3. Profit taking
Analysts believe that the good old profit-booking is one other factor behind the outflows in mutual funds. "A lot of people are scared of the heights and fear and greed is playing out in the market. It is always healthy to book profits if you have invested for 5 years or more and then redeploy the profits once your conviction is reinforced in the market," said Shah.
In the past year, the NSE barometer Nifty has risen 25.41 per cent while on a year-to-date (YTD) basis, too, the returns have been noteworthy at nearly 8 per cent.