The Hindu Business Line : Back in business

With the equity market looking up, retail investors have come back to mutual funds. Industry experts feel that this time, the smaller investors are far more alert and will exit at the first sign of trouble.

She questions her financial planner more closely than ever, makes it her business to check out CNBC, takes emphatic calls on the market with far greater élan than she used to... meet the retail investor of modern times, one who has turned wiser and smarter with experience. And the latest run in the stock market has only made her happier - and perhaps a bit more greedy and nervous as well.

That small investors in mutual funds have arrived is obvious and is reflected in the nature of inflows that have been generated from non-institutional sources. Their contribution to the industry's overall corpus, which now stands well over Rs one lakh crore, has improved in recent months. So has the character of their involvement. The conclusion is simple: Retail participants have entered in larger numbers and have been quite active in terms of moving in and out.

Retail activity in mutual funds is also apparent from the rise in the number of transactions generated by fresh investments, redemptions and switches between schemes. Individual investors seem to have booked profits at every opportunity and taken additional exposure when corrections have set in. And such opportunities have appeared regularly, thanks to the rapid escalation in stock prices. The market, as has been well documented, did move up fast; the BSE Sensex went from around 3,000 to over 5,000 in a record time.

Fund circles, which attribute these developments to the state of the market, also refer to certain historic factors that have encouraged retail involvement. These factors did not originate overnight but their impact could not have been more telling. The investment scenario in India, says Sandeep Singh, head of sales at Templeton MF, has changed and investors have largely said bye-bye to high, risk-free (read: guaranteed) returns. Their affairs are no longer insular, given the complexities involved and the downward pressure on interest rates.

"Many Indians are realising the importance of the role that personal savings will play in their lives, both before and after retirement", he notes, adding that investors are contemplating a change from traditional products to a financial planning model that is driven by asset allocation.

The fund houses, on their part, have tried to leverage on the retail investor's penchant for new alternatives in a variety of ways. They have, for instance, lately made a special effort to introduce `monthly income plans', or MIPs as they are more popularly called. The average MIP, which chiefly invests in debt securities, but has a measured equity component as well, is said to be a typical retail product, capable of attracting the average investor who seeks regular earnings.

Individual savers are taking to MIPs in a big way, maintains T.P. Raman, Managing Director of Sundaram MF. "It is an alternative to fixed deposits and whets the investor's appetite for steady income," he points out. There are already around 20 MIPs vying with each other, some of them of fairly recent origin. These will be supplemented by schemes from Kotak Mahindra (which will soon be open for on-going subscription), Sundaram, HDFC and Reliance.

A section of retail investors is also lapping up the dividends that are being announced in equity schemes. Aided by strategies devised by distributors, they are taking home these tax-free payouts, some of them quite sizeable. In fact, dividends in the range of 20-45 per cent have been common this year and players like Templeton MF, Birla MF and Reliance MF have remained active on this front. Reliance Vision's 45 per cent dividend on December 3 is a case in point. And Birla Advantage has already announced that it will offer three dividends one after the other, the process ending in early 2004.

Distributors have been really playing a dynamic role in steering a large section of the retail segment to equity products. In many cases they are advising clients to take active calls and book profits at higher levels. The plan is to help investors make the most of the changing market circumstances.

Rajiv Bose, a young distributor who caters to high net worth individuals, says he has guided his clients' surpluses towards leading funds ever since the broad market started moving up. "The fact that these funds have turned in a good show has helped my case considerably. Individual savers, in my experience, are extremely picky and will mostly stick to only the top performers," he adds.

It may be mentioned here that the three top performers in the year ending November 30 are Franklin India Prima, Reliance Growth, Alliance Basic - all of which have attracted strong inflows from the retail end. According to figures worked out by the fund-tracking agency, Value Research, the three provided 134 per cent, 131 per cent and 129 per cent returns respectively during this period. The last three months were not too bad either: Tata Equity Opportunities, (40 per cent), HSBC Equity (37 per cent) and Sundaram Select Midcap (36 per cent) were at the top of the heap.

Other distributors point out that retail participants are increasingly looking at the quality of portfolios more critically. The more discerning ones are by now accustomed to the investment styles followed by their favourite fund managers and others are joining their league. There is, for instance, growing awareness of funds with a mid-cap orientation. Already, there are a couple of schemes (managed by Birla MF and Sundaram MF) with a clear mid-cap focus. A number of others have mid-cap stocks in their portfolios at this juncture.

Conscious investors are also aware of the systemic changes that are happening around them. They know about options that are based on ideas like asset allocation (Templeton MF) and dividend yield (Birla MF). They are familiar with schemes like Pru ICICI MF's Dynamic Plan, which are flexible enough to drastically modify their investment styles in line with changes in market conditions.

The individual who wishes to deploy his resources needs guidance in one form or other, says D.P. Poddar, a veteran investor, who has been tracking the market for decades. There is need to follow a regimen based on the principles of asset allocation, a trend that is already emerging in India, though in a small way. "Retail, easily the most vulnerable, must understand the merits of long-term savings. This is particularly relevant in a volatile and completely unpredictable market," he says.

Dealings with retail investors have been an eye-opener of sorts for financial advisers. Banu Prakah Agarwal, a chartered accountant who helps individuals with their tax planning, is of the view that the relatively smaller investors have far more questions to ask than bigger ones. "This is because of certain basic characteristics... they are jumpy and will exit at the first signs of trouble. Bitter lessons learnt in the past are sitting heavy on their minds," he feels.

The fund industry is of the view that retail will always remain a key element in their universe. As Sanjay Prakash, CEO of HSBC MF, puts it, retail can only grow in stature. "The fact that HSBC MF is promoted by a multinational bank has not stopped them from entering in decent numbers," he says.

Picture by Bijoy Ghosh

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