“Long-term investors sitting on losses typically tend to exit their investments during market upmoves. This is the reason for the large number of closures,” said Puneet Chaddha, CEO, HSBC Asset Management. Chaddha added that some equity investors may have moved into 1-year fixed maturity plans in March to take advantage of high interest rates and the double indexation benefit.
“Many first-time investors who entered the market in 2007 and 2008 and were out of the money are gradually exiting their mutual fund investments. This trend is likely to continue for some more time unless the market sees a sustained uptrend for six to seven months at least,” said Dhirendra Kumar, CEO, Value Research, a mutual fund tracker.
According to Lalit Nambiar, fund manager (equities) and head (research), UTI MF, Indian retail investors typically shy away from cutting losses: “If they bought a scheme when the NAV (net asset value) was 25 and it subsequently slipped to 20, they will sit on the investment till the value comes back to 25, even if it means holding on to the investment for several years,” he said, adding that there was a possibility that investors were playing it smart and exiting their investments as they didn't want to take the chance of awaiting the outcome of the national elections, which could swing the market either way.
Folio closures are worrying as equity assets are a lot stickier than debt assets and can generate higher revenues for fund houses. Fund managers have been advising investors to continue their systematic investment plan portfolios even in tough times but long-term investors who entered the market in 2007 and early 2008 have been particularly keen on exiting during market upmoves.
Folio closures have remained steady throughout FY14. The number of account closures touched a high 6.99 lakh in May but fell below the 1 lakh mark in August for the first time in 19 months, sparking hope among industry participants that the worst was over and that the quantum of folio closures was beginning to bottom out. However, folio closures numbering over 5 lakh in September put paid to these hopes. The last three months of CY13 were the worst quarter of the calendar year, with 12.78 lakh folios getting extinguished. The benchmark BSE Sensex rose about 9% in the last quarter of CY13.
At the end of March 2014, equity folios accounted for about 73.7% of the industry’s total of 3.95 crore investor folios. This had stood at 86.2% at the end of March 2008. Assets under management (AUM) of equity schemes stood at Rs 1.65 lakh crore, comprising 20% of industry’s overall AUM of Rs 8.25 lakh crore.
Folio closures is not the only trend the mutual fund industry has to worry about. Despite seven months of inflows, net outflows during FY14 in equity schemes amounted to Rs 7,627 crore. This compares with outflows of Rs 12,931 crore in FY13.
Equity folio closures have been a regular feature every year since FY10. The financial years from FY05 to FY09 had seen net creation of folios, with FY08 seeing about 34,000 folios created per day, the most in a financial year. More than 1 crore equity folios have closed in the last four-and-a-half years.