The lacklustre performance of the equity market in the last 18 months has proved to be a challenge in mutual funds' (MFs) push for higher penetration. In the first eleven months of the current financial year (FY 2023), the industry has added only 3.7 million new investors compared to almost 10 million during the same period of FY22, shows industry data.
MFs identify new investors through their Permanent Account Number (PAN) and a new PAN is counted as addition of a new investor.
According to MF executives and senior distributors, the new investor addition has moderated mainly due to a drop in short-term performances of equity schemes. Investors are known to go by past returns.
An analysis of the performance of equity MF schemes shows that almost half of them are in the red and only around 20 per cent have delivered a return of more than 5 per cent.
"Primarily, it's due to the market condition. New investor addition has reversed to mean after a record growth in the previous years, when the market was seeing a strong rally," said G Pradeepkumar, CEO, Union Asset Management Company.
The poor performance of equity schemes is a result of weakness in the market for over the last 18 months. The Nifty50, which scaled a high of 18,000 in October 2021, has since mostly hovered in the 16,000-18,000 range.
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Overall, the two key indices — the Nifty50 and the Sensex — are down 2.6 per cent and 1.6 per cent, respectively, in the last 18 months. The market has been weighed down by comparatively higher valuations, rise in interest rates globally and outflow of foreign investments, apart from events such as Russia-Ukraine crisis, the Hindenburg report on the Adani Group and bank collapses in the US and Europe.
By comparison, the performance of equity MF schemes looked much better at the end of the previous two financial years, bringing a record number of new investors into the fold. In FY22, the Nifty50 had rallied over 18 per cent.
"Equities were trending until a year back due to lack of other high-yielding investment options and a strong rally in the equity market. But with the interest rates rising, bank fixed deposits are proving to be a roadblock for MFs when it comes to attracting new investors," said Anand-based MF distributor Nikhil Thakkar.
Bank FD rates, which had plummeted to below 5 per cent in 2020, are back to offering around 7.5 per cent.
The lack of any exciting new fund launches in the equity space also led to a slowdown in investor addition. According to MF executives, new fund offers (NFOs) by top fund houses help the industry bring in new investors, thanks to aggressive marketing and sales strategies deployed at such times. In the 2022 calendar year, MFs launched more than double the number of NFOs than in 2021 but most of these were in the passive debt space, which isn't much of an attraction for retail investors. Even distributors show lower interest due to low commissions offered.
However, the existing investors have continued to pour money into MFs, irrespective of the market situation. Investors put in Rs 10,000 crore into MFs through the systematic investment plan (SIP) route in each of the last 12 months. In fact, reports have shown that investors are putting more money into MFs during phases of market downturn.
"Investors who came in 2020 or before have been unaffected by the market volatility and have continued to put money into MFs. This is primarily because they have seen the correction cycle in 2020 and are still sitting on double-digit profits," Thakkar said.