Retail investors shy away from equity Mutual Funds

MUMBAI: A Revival in net flows into equity funds is hardly a trend reversal as tenacious retail money and independent financial advisers who bring in small investors continue to shy away from the market, money managers say.

Equity mutual funds collected Rs 1,250 crore in January, recording their first net inflows after five months. But most came from high networth individuals (HNIs), who tend to get in and out of funds, money managers said.

“When that kind of money comes in, it’s not sticky,” chief executive of a domestic fund house said, but refused to be identified as his firm also caters to the HNIs. “This is not true retail (money) which will come in and stay.”
The BSE Sensex skidded 6.3% in January and helped attract investors, many of whom had exited equity funds in 2008 fearing lofty valuations, said Sanjay Sinha, chief executive of DBS Cholamandalam Mutual Fund. “One-month inflow cannot be an indicative of a trend,” he said.

Between August and December, about Rs 7,100 crore flowed out of such funds as investors booked profits and financial advisers held back recommendations on fears a new rule banning entry fee charged by funds would cut their fees.

“It’s a better situation than August to December but we would like to see it on a more sustainable basis in the next few months for us to establish it as a trend,” said Saurabh Nanavati, chief executive officer of Religare Asset Management.

MISSING RETAIL CLIENTS

Equity funds, which managed Rs 1.9 trillion at the end of January, are key to the profitability of money managers as such funds earn the biggest management fee of about 1%.

That’s one reason money managers were stunned by a ban on entry fee charged by them from August 1 last year as it limited the ability of fund managers to pay distributors.

The fund industry fears distributors would now switch to selling insurance-linked investment products which pay higher fees.

TP Raman, managing director of Sundaram BNP Paribas Mutual Fund, said retail clients were still shying away from equity funds and flows via systematic investment plans, which allow investors to put small amounts every month, have dropped.

“The IFA (independent financial advisers) seem to be missing from the scene now,” Mr Raman said, calling it the main reason why retail participation has dropped. “They were getting us the smaller tickets, which were more stable and which had embedded value.”

A new equity fund from Sundaram has collected Rs 500 crore and received 65,000 applications. Typically, Mr Raman said, his new funds get more than 100,000 applications.

HNIs account for about 20% of the assets of Indian equity-oriented funds and churn nearly a fifth of their investments within six months, according to latest data released by the Association of Mutual Funds in India (AMFI).

By comparison, retail investors control 65% of the assets and keep 90% of that parked for more than six months, providing stability to the industry’s equity assets.