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Even as foreign institutional investors queue up at the exit and domestic institutions hesitate on the sidelines, retail mutual fund investors continue to keep faith in the potential of Indian stocks. The absence of panic redemptions from equity funds, a steady trickle of inflows into funds and clear preference for schemes with a good track record, all suggest the coming of age of the mutual fund investor.

The unfolding global credit crisis has shaved 22 per cent off the Sensex so far this year, with equity funds losing 24 per cent of their collective value. But this hasn’t caused equity fund investors to scramble to redeem their units. Total outflows from equity funds, which averaged about Rs 8,000 crore a month in end 2007, have fallen to a third of this level in recent months. Inflows into equity funds have certainly moderated from their highs, but they haven’t dried up. Equity funds continue to witness a reasonable level of gross inflows, with a significant portion of this money coming in through systematic investment plans - inflows that will continue irrespective of short-term market gyrations. In a significant trend, new money is now going mainly into established open-end funds, while new fund offers (NFOs) are scrounging for subscriptions. Clearly, retail investors have stopped betting on new funds sold at “par” for quick gains and are turning to funds with a proven record, even if this means getting in at a higher NAV. This is a welcome trend for the fund industry, as the NFO craze encouraged short-termism that led to large-scale duplication of products and allowed unproven funds to quickly add assets and flourish. Even more heartening is the fact that investors are savvy enough to choose between the scores of equity funds based on their performance. Funds that attracted new money over the past year were not the largest or most-advertised schemes, but the ones which protected their NAVs better than peers in a falling market. Funds with poor performance saw their assets shrink as investors pulled out.

Despite these positive trends, mutual funds remain too small a force to influence market direction. The rapid unravelling of stock prices over the past eight months reveals the extent to which the market relies on global liquidity and foreign investor interest for sustenance. A stable source of domestic money, invested for the long term, may help ensure that the stock market is anchored more closely to domestic fundamentals. A good way to achieve this is to give more Indian investors the option of allocating a part of their retirement savings to equities. Throwing open the New Pension Scheme to non-government employees and allowing them to choose between plans and fund managers, recently mooted by the Government, appears to be a workable option. After all, if the experience of the fund industry is anything to go by, the retail investor now knows enough to exercise these choices well.

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