Hurdles to long-term investment

With returns of 15-30 per cent per annum during the last ten years, equity mutual funds have delivered the goods for investors who stayed wedded to them. Despite this, the industry has failed to convince investors that mutual funds are a good option for their long-term goals.

Ask an ordinary investor regarding this, and he will probably tell you that his ‘long-term' money is locked into an insurer's endowment plan or public provident fund. If he owns equity mutual funds at all, he plans to cash out in a couple of years' time. Data from the Association of Mutual funds of India shows that 48 per cent of all investors in equity mutual funds held their units for less than 2 years.

INFLATION IGNORED?

This investor behaviour defies logic. Why does an investor stay on patiently for ten years with a product that earns him 5-6 per cent a year, and yet shun one which delivers 15-20 per cent?

After all, the basic intention of putting away money for the long term is to make sure your savings grow at a rate that beats inflation. During a ten-year period, stock market investments are more likely to deliver an inflation-beating return than debt products. In the short term, equity investments are more likely than any investment to sustain losses.

This quirky investor behaviour suggests three things.

We like predictability.

One, Indian investors prefer predictability compared to returns. They are so spooked by the ups and downs of the stock market that they would rather choose a guaranteed return product that barely preserves their capital, compared to a market-linked one.

If this is the problem, funds can address this by offering guaranteed return products. Insurers in India have always offered guaranteed return products (with such a small ‘guarantee' that it can be easily accomplished), but funds haven't, as the practice is frowned upon by the Securities and Exchange Board of India.

Guaranteed returns however, aren't expressly forbidden by Securities and Exchange Board of India. All the regulations say is that, if a fund makes a guarantee, it should have the resources to make good the shortfall, if the portfolio doesn't deliver the promised sum.

Lock-in is good.

Two, investors actually like the discipline that a lock-in period imposes. Insurance plans or the PPF require you to deposit money every year, and don't allow you to withdraw it too easily. Mutual funds, in contrast, have embraced the open-end structure. Investors unhappy with the fund's performance can pull out their money on any day of their choice. When markets do a yo-yo act, there is thus a strong temptation to pull out.

Finally, investors may willingly accept a locked-in equity investment, if they are given the feeling that the money is being set aside towards a noble goal. The old Unit Trust of India (UTI) had enormous success with its long-term schemes such as Rajalakshmi, Grihalakshmi, and so on. These specifically allowed savings towards a goal such as a daughter's marriage or education. Insurance companies successfully market children's plans to investors, though they call for long-term investing in equity instruments.

No branding please, we're the Funds.

This suggests that where the mutual fund industry has failed is in branding and marketing its products. By branding its offerings as ‘mid-cap funds', ‘infrastructure funds', ‘strategic sector funds', and so on, the industry has failed to strike a chord with its customers.

Information on where the fund plans to invest may be quite useful to an informed investor who dabbles daily in the stock market.

But to an ordinary person looking simply to save money to fund his daughter's college degree ten years hence, the stock market association may be quite disconcerting.

Overall, defining fund products in terms of the investor's requirements (say, a retirement fund, or a schooling fund) may be all that is needed to make sure that investors stay with equity funds for the long term.

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