As they say, common sense is not so common. Retail investors in stock markets seem plagued by this. A presentation by HDFC Mutual Fund brings out this behaviour quite starkly.
In 2003, when the one-year forward price-to-earnings multiple stood at 9.2x, MF houses' net collection was a mere Rs 118 crore. In 2008, when the P/E ratio stood at a whopping 20.4x, the highest in a decade, fund houses collected a record Rs 52,701 crore. After 2008, the P/E multiple hit another low, of 14x in 2013; yet, the collections were negative, at (-) Rs 14,371 crore. Even now, when the BSE's Sensitive Index, or Sensex, is at an all-time high, the number of folios in May fell by 346,000.
Leo Puri, managing director, UTI MF, believes that in India, since other asset classes such as debt offer a good nine per cent return, many investors prefer to book profits and park money in these instruments."While it is frustrating when investors do not spend time across cycles, it is something that does happen globally as well. In India, it is more pronounced because other asset classes are also offering good returns."
Puri also believes the distribution structure also needs to aid the sector, as these can help reduce churn, especially in good times.
"When the performance is poor, investors can move on. But if the performance is healthy, distributors can help by discouraging churn. Ideally, investors should take the systematic investment route (which they often don't)," he says.
The returns from markets, surprisingly, haven't been too bad, even if one considered the past six years. The Sensex has returned at a compounded annual growth rate of 10.5 per cent.
However, it has been very volatile. In 2009, the annual returns fell 38 per cent. It recovered sharply in 2009 and 2010 and returns rose by 81 per cent and 11 per cent, respectively.
Again, in 2012, the returns fell by 10 per cent, only to give a positive return of eight per cent in 2013. Of course, the Sensex is at an all-time high of over 25,000 points now. And, some research agencies are giving targets of even 100,000 points by 2020.
Even in the case of stocks, though the turnover of the retail investors' segment has risen since the beginning of the year, the sell side has swelled more than the buy side. The average retail turnover in January was Rs 1,900 crore. This has risen to Rs 3,440 crore in June. But the average sell in June is Rs 1,769 crore vis-a-vis buys of Rs 1,671 crore. Clearly, sell orders are exceeding buys even when the market is hitting new highs on a day-on-day basis.
However, Sundeep Sikka, chief executive of Reliance MF, believes the seller and buyers are different people. "Many investors are selling after they have made profits over a number of years, whereas buyers are also coming in," he says.
In fact, another investment banker is happy that retail investors are back in the market, even if as only sellers. "After they have booked some profits, they are most likely to re-invest, a positive sign."
Sikka is more bullish about other changes. In the past six months, the number of calls to their call centre has increased three times; distributor activation is at an all-time high; people are even willing to enter at a net asset value of Rs 650. "In the past few years, only 4,000-5,000 distributors of the 100,000-strength were actually active. Now, we are getting calls from all parts of the country," he says.
Puri, who took the big step of starting 101 branches outside the top 15 cities in February, in which participation is lacking, believes things will start changing because many investors in these places are first-time.
In addition, there needs to be established independent financial associates in these areas, who will be able to generate investor confidence. "We will benefit from these investments over a longer period of time," adds Puri.
Sikka believes this bull run is different from others. He says unlike others, the overall mood is much better. "Whether there are traders or distributors or investors, everyone is looking quite positive for the longer term," he says. These are good signals that will help investors make money.