The question of redemption

Due diligence must for MF investors who invest in equity schemes. Retail investors in mutual funds (MFs) have displayed surprising maturity, staying invested in equity schemes despite the sharp fall of the stock markets from mid-January. However, it is too early to conclude that Indians have graduated to becoming long-term investors in equity and equity MFs. Experience shows that retail investors panic whenever markets go into a tailspin, cashing out part of, if not all, their investment in equities and equity MFs. Such behaviour hurts investors and MF schemes. Also, liquidation of positions held by MFs only serves to further weaken sentiments in markets. The 11% decline in assets under management (AUM) of MFs in June from the May level was caused mainly by the fall in the stock prices and not by large scale redemption, a nightmare most fund managers fear when stock markets tumble. Redemption pressures were experienced by the liquid funds, as companies withdrew money for advance tax payments. As liquid funds are designed to be short-term plans, offering reasonable returns, withdrawals, which are seasonal in nature, should not be a cause for much concern. Well-managed equity MFs deliver reasonably good returns over a long term. While they would be affected by market volatility, investors could protect themselves by investing in schemes which suit their risk profile. For that, investors must make the effort to understand the objective of the fund, investment style of its portfolio manager and the bias of the fund. Investors must also be very clear about their investment objective and the period for which they would like to stay invested in a fund. Investors seeking stable, low-risk returns are better advised to keep a larger portion of their savings in debt schemes or conservatively managed/balanced equity MFs. The MF industry and its regulator, the Association of Mutual Funds in India, also need to take steps to keep the activities of asset management companies above board. Breach of their fiduciary role, such as manipulation of net asset value of schemes by fund managers, reported recently, could dent the confidence of investors in professional managers. They would do better to explain the constraints in which they operate to the investors rather than indulge in malpractices.