A majority of mutual fund (MF) equity fund assets are top rated. According to Value Research, an MF tracker, about 61% of rated funds had top rating of either five stars or four stars. This is indicative of superior risk-adjusted return score. Over the past five years, on an average, 60% of top rated equity funds have continued to be top rated.
This trend perhaps indicates that MF investors aren?t as gullible as they are made out to be. While they invest in well-marketed new fund offerings (NFOs), they also don?t get carried away by the hype. A majority of investments continue to be made after due diligence being carried out on fund?s risk-adjusted ratings.
A cursory study of rating migration (movement of ratings) also suggests that the long-term ratings are robust and could be taken as an important parameter for making investment decisions.
According to Value Research data, only 18% of equity funds over the last five years, have been downgraded from a top rating. And even in such instances, the downgrading in worst case scenarios has happened to only a three-star rating (from a four or a five year) and not lower. Three star rating indicates performance in line with industry averages.
Regulators perhaps need not worry so much about wrong mutual fund advisory services. About R86,351 crore of investor equity money is in the safe hands of top performing performing fund managers. Instead the regulator?s energy should be focussed to ensure distributors don?t short-change investors by inducing them to churn their portfolio. Or in other words, ensure the investors stays for the longer haul.
In August 2009, the market regulator, Sebi banned entry load simply to prevent rapid churning of investor portfolio by bank distributors. NFOs were then sold to customers by advising them to book profits on their earlier fund investments.
While investors were happy to do so, since fund?s NAV had only appreciated from bank?s portfolio advice, banks were happy pocketing the entry load (2.25%) made on the new investment.
With the banning of entry load, that practice has come to an end. However, what is frightening is the fact that investors now have become myopic, perhaps due to the effect of earlier conditioning.
Average holding period of an equity fund investor is about 2 years and 2 months, as per data given by the Association of Mutual Funds of India. In contrast, it is about eight years for US equity fund investors. And if the folio data is any indication, these investors aren?t returning to the industry.