Last year, the Securities and Exchange Board of India (Sebi) implemented a number of landmark decisions that were aimed at making mutual fund investments more transparent for investors. None was bigger than the abolishment of entry loads. When entry loads were completely abolished on 1st August 2009, a lot of changes were expected to take place. The decision was carried out to benefit investors, and it has. However, in an indirect manner, the decision has had an adverse effect on investors as well.
In the past few months, there has been a sharp decline in the money being invested into mutual funds. In fact, there has been a higher amount of redemption. The net outflow has been higher than the net inflow, even at times when the stock has been in a relative bull run. Since August 2009, the net outflow from equity funds has been to the tune of Rs 5,600 crore. No month since then has reported a higher inflow. One of the prime reasons behind this has been the abolishment of entry loads.
Now, I?ll forgive you for being confused right now. As an investor, the outflow might be of little concern to you. It?s the mutual fund industry that should be concerned, you would say. And you?re right about that. The truth is that the fund industry should be ? and is ? concerned about the declining investments in equity funds. But the other truth is that even investors should be concerned about this, simply because it is you who has stopped investing in equity funds, which is something that is not in your best interests.
A majority of Indian investors put their money into what they?re asked to invest in. The product that is sold and marketed heavily is the one that is opted for by investors. After the abolishment of entry loads, selling mutual funds ceased to be a lucrative business for fund companies. They still own and run funds, but have stopped selling them. Instead, they now market and sell other products like ULIPs, which are more lucrative for them but not as much for investors. And Indian investors are notorious for buying what is pushed the most; most often without trying to understand if the product is really beneficial.
The worst thing is that in doing this, investors give up the right investment strategy, the one that is likely to earn them the highest amount of returns in the long-term. We?ve been advocating time and again that steady and regular investments (SIPs) in equity funds is sure to give you better returns than any other form of investment, in terms of earnings, liquidity, taxability and transparency. We looked at all of the possible five-year periods in the last ten years and found that the even the lowest returns earned by an average large-cap equity fund would have been about 25%. During these time periods, even at the deepest point in a crash, the average five-year returns didn?t drop below 55 per cent. Now tell me if any other form of investment would have fared better, that too with the availability of encashing within two days, tax-free if held for over a year. Nothing beats a simple and straight-forward method of investing via SIPs in diversified equity funds. But the onus of adapting this investment strategy lies upon the investors. Fund companies are certainly not going to persuade you, investors investing in their funds are not going to pay for their vacations. It?s for you to decide what is most beneficial and take the right decision.
Author is CEO of Value Research