As it happens ever so often, retail investors seem to have missed the equity bus yet again. Even as the benchmark indices climbed more than 25% this year, many investors, especially those who had entered during the peak of early 2008, used the opportunity to exit the market by redeeming their investments in equity mutual fund schemes.
Equity funds witnessed outflows of R12,702 crore till November this year, the second highest outflows in the category witnessed in the last six years. This, in a year when the benchmark BSE Sensex gained over 25% and the market saw overseas inflows of nearly $23 billion. The year 2010 had seen R15,849-crore outflows.
“Investors who have been waiting on the sidelines for several years hoping for the markets to move up used the rally to make good their losses or book small profits. That’s the reason for the uptick in redemptions we have seen this year,” said Dhruva Chatterji, senior research analyst, Morningstar India.
Adding the category of ELSS — which are tax-saving schemes that invest in equities — outflows this year touch R13,902 crore against R15,508 crore in 2010.
So, theoretically, if the numbers for December are accounted for, equity outflows in 2012 could yet surpass those seen in 2010.
Those who invested during the peak of early 2008 suffered when the market tanked in the aftermath of the global financial crisis. Many of them, who were not willing to book heavy losses, have been waiting patiently for their investments to break even. At 19,200-levels, the market is still some distance away from that peak, but the rally has done enough to make investors press the exit button. “Investors are now relieved that they can exit with their capital intact,” said Naval Bir Kumar, vice chairman, IDFC MF.
The volatility in the market and the absence of a clear directional trend also dented retail investors’ confidence. For instance, while the year began well with the Sensex touching a high of 18,428 points on February 22, it fell to the year’s low of 15,948 points on May 23, before regaining steam in September and touching a 19-month high in December. “Investors seem to have run out of patience. The industry has concentrated on increasing the number of SIPs this year but it has not been able to arrest the quantum of outflows in equity schemes,” said Sarath Sarma, executive director, IDBI Asset Management.
Investors also migrated to debt products. While the early part of the year saw significant inflows into fixed maturity products, dynamic bond funds saw major inflows after March. “Large inflows have come into income funds and duration bond funds,” said Chatterji. Most of the debt funds categories, including liquid funds, ultra short-term income funds and medium and long-term gilt funds, have given average category returns over 9% this year. The assets of a universe of 18 dynamic bond funds have swelled by nearly 400% in past one year, according to Morningstar India.
That explains why the overall assets under management (AUM) of the industry has grown despite outflows in equity schemes. In November, the industry’s month-end AUM stood at Rs 7.93 lakh crore, the highest month-end assets for the industry since April 2010. November’s figures represent a 20% rise over the AUM garnered in January (Rs 6.59 lakh crore) and a 35% rise over the AUM of Rs 5.87 lakh crore posted in March, the lowest in the year.
According to Kumar, exits in equity schemes are unfortunate given that the market still remains fairly priced right now. “We try to educate investors that their investments are more likely to be profitable if they enter the market when things are gloomy rather than when everything is looking up. But investors have a tendency to invest when the markets have already run up substantially and look expensive,” said Kumar.
Market observers, however, believe that equity schemes might see inflows in 2013 if the current rally continues for a few more months. Sarma is hopeful that the focus on increasing SIP numbers may see some results in the coming months.
Interestingly, retail investors are not the only ones to have exited Indian equities this year. Unlike their overseas peers, domestic institutions have sold equities worth about $10 billion in the year to date.
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