MF flows suggest retail investors are savvier

Aarati Krishnan | Updated on September 10, 2011


‘‘Retail investors get their timing all wrong with equity funds. They have lost their appetite for equity after the market crash.'' These are the beliefs perpetrated by commentators analysing the monthly data on mutual fund flows from the Association of Mutual Fund of India (AMFI). However, a closer look at the data reveals that they are quite far from the truth. It is data on gross inflows and outflows from equity mutual funds, rather than the more commonly used ‘net inflows', that help one get the true picture on retail behaviour. ‘Net inflows' deduct the total pullouts from equity mutual funds by one set of investors from the total investments made by another wholly different, set.

Tracing gross flows

Tracing the gross flows on a quarterly basis over the past four years throws up the following three trends:

Retail investors did pour record money into equity funds at the previous market high and sharply reduce their investments when markets bottomed out. Equity mutual funds received record quarterly inflows of Rs 41,000 crore on a gross basis, in January-March 2008. Inflows fell to Rs 4,500 crore by the January-March 2009. But while that is well-known, what is not is that inflows have charted a quick and, thereafter, steady recovery from those rock-bottom levels. Gross inflows into equity funds jumped up to Rs 14,000 crore in the third and fourth quarters of 2009. Thereafter, they have lodged at Rs 15000-19000 crore in 2010 and 2011. That may be way below the heydays of 2008, but is a threefold improvement from the lows.

Evidence that retail investors have become savvier also comes from two other trends. As opposed to 2007-08, a good number of retail investors (about a fourth of inflows) are today putting in money through the systematic investment plan route. What is more, the lion's share of new investments is going into older open-end schemes that have a track record, as opposed to the new fund offers of 2007-08.

Even as gross inflows into equity funds have charted a steady course in the past two years, there have been simultaneous redemptions from equity funds. They hit a record low (Rs 4,700 crore) in January-March 2009, picked up in subsequent months and peaked (at Rs 29,000 crore) in the recent July-September 2010 quarter. Now, given that the Sensex was nudging the 20,000 mark in that period, it was an exceptionally good time to cash in on equity funds.

Overall, this shows that retail investors putting in small sums into funds with a good track record. They are doing it regularly, irrespective of market swings. They are using market highs to cash in on their older investments. All this is surely a sign of collective wisdom at work!

Published on September 10, 2011

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