“Buy low and sell high” is a lesson mutual fund investors in India continue to ignore, as trends in money flows into mutual funds over the past two years show. Flush with funds in a rising stock market until early 2008, equity funds saw new inflows dwindle in the bear market, reviving only in the recent rally.
However, the good news is that older fund investors held on patiently as NAVs fell, and reaped gains from the subsequent rally. Another key trend was some investors shifting attention to other asset classes when returns from equities fell. Gold ETFs and income funds saw steady inflows during periods marked either by uncertainty or poor performance by equities.
The tendency to chase returns rather than anticipate them appears to have taken hold of many equity fund investors over the past two years. Net inflows into equity funds (gross sales minus redemptions) peaked, with the stock market in January-2008 at Rs 12,717 crore, though some spillover effect remained with healthy inflows in the following months. However, from April onwards, fund flows dipped as the market’s free fall continued. Behind the curve
An analysis of trends in monthly equity fund flows between early 2007 and now shows that investors have been slow to react to market spikes as well as its falls. Though the equity market was buoyant from August 2007, the gush of inflows caught up only later in November. When the market corrected in January 2008, inflows continued for a few more months.
Net flows that had turned negative following the October 2008 crash, remained so till April 2009 (but for February, which reported net inflows). They resumed in full flow again in May 2009, two months into the recovery rally. These suggest that investments, more often than not, chased good performance from equity funds.
Investments picked up after equity funds put in an average holding period return of 32 per cent between August and November 2007, and 25 per cent in the two-month period between March 2009 and April 2009.
Herd mentality, the need for assurance that the investment value will not drop immediately after committing funds, and the fear of missing out on rallies appear to be the key motivating factors for retail investors in equity funds. Such a short-term approach to equities may also have limited investor participation in the current rally, as the monthly net inflows remained unimpressive throughout last year and the first quarter of the current year.
New fund offerings also garnered larger sums during bullish phases — equity NFOs in April-January 2008 saw inflows of Rs 33,191 crore — but investors appeared to have given them a wide berth during the bear phase.
Fund houses too should shoulder some of the blame for this; as new fund launches have peaked during good times. Triggered also by fewer offerings during the period, equity NFOs garnered only Rs 2,293 crore between April 2008 and March 2009.
The revival in equities since April 2009 has seen more new funds cropping up. With positive response from investors, these have collected over Rs 3,221 crore between April and July. Reluctant to pull out
However, the good news is that older fund investors held on patiently as NAVs fell, and reaped gains from the subsequent rally. Another key trend was some investors shifting attention to other asset classes when returns from equities fell. Gold ETFs and income funds saw steady inflows during periods marked either by uncertainty or poor performance by equities.
The tendency to chase returns rather than anticipate them appears to have taken hold of many equity fund investors over the past two years. Net inflows into equity funds (gross sales minus redemptions) peaked, with the stock market in January-2008 at Rs 12,717 crore, though some spillover effect remained with healthy inflows in the following months. However, from April onwards, fund flows dipped as the market’s free fall continued. Behind the curve
An analysis of trends in monthly equity fund flows between early 2007 and now shows that investors have been slow to react to market spikes as well as its falls. Though the equity market was buoyant from August 2007, the gush of inflows caught up only later in November. When the market corrected in January 2008, inflows continued for a few more months.
Net flows that had turned negative following the October 2008 crash, remained so till April 2009 (but for February, which reported net inflows). They resumed in full flow again in May 2009, two months into the recovery rally. These suggest that investments, more often than not, chased good performance from equity funds.
Investments picked up after equity funds put in an average holding period return of 32 per cent between August and November 2007, and 25 per cent in the two-month period between March 2009 and April 2009.
Herd mentality, the need for assurance that the investment value will not drop immediately after committing funds, and the fear of missing out on rallies appear to be the key motivating factors for retail investors in equity funds. Such a short-term approach to equities may also have limited investor participation in the current rally, as the monthly net inflows remained unimpressive throughout last year and the first quarter of the current year.
New fund offerings also garnered larger sums during bullish phases — equity NFOs in April-January 2008 saw inflows of Rs 33,191 crore — but investors appeared to have given them a wide berth during the bear phase.
Fund houses too should shoulder some of the blame for this; as new fund launches have peaked during good times. Triggered also by fewer offerings during the period, equity NFOs garnered only Rs 2,293 crore between April 2008 and March 2009.
The revival in equities since April 2009 has seen more new funds cropping up. With positive response from investors, these have collected over Rs 3,221 crore between April and July. Reluctant to pull out
However, what’s interesting is that while new money committed to funds dropped in 2008, the year did not see any significant pick-up in redemption activity. Investors preferred to remain invested in equity funds, despite a fall in, or poor performance of, the market.
While pullouts from equity funds did pick up a little after the January 2008 correction, they dwindled considerably in the months thereafter and remained low throughout 2008. Though the average NAV of diversified equity funds plunged by 55 per cent in 2008, average monthly redemption numbers stood at just Rs 3,375 crore.
Even in October, when the equity market nose-dived to new lows, investors refrained from pulling out a large chunk of their investments. Investors took out only Rs 2,652 crore in October, compared to Rs 7,536 crore in January 2008, the market peak. Another interesting sidelight is that some investors did cash out close to, though not exactly at, the market peak. Equity fund redemptions, which began to inch higher as early as May 2007, peaked in October 2007, well ahead of the market peak in January.
That the average monthly redemption stood at about Rs 6,905 crore between April-December 2007, even when equity funds notched up average holding period returns of 73 per cent, suggests that a section of investors does constantly monitor fund portfolios and book profits.
The trend appears to be gathering strength in the recent rally too. Following the broader market rally, the average monthly redemption between May and July 2009 went up to Rs 4,082 crore.
While pullouts from equity funds did pick up a little after the January 2008 correction, they dwindled considerably in the months thereafter and remained low throughout 2008. Though the average NAV of diversified equity funds plunged by 55 per cent in 2008, average monthly redemption numbers stood at just Rs 3,375 crore.
Even in October, when the equity market nose-dived to new lows, investors refrained from pulling out a large chunk of their investments. Investors took out only Rs 2,652 crore in October, compared to Rs 7,536 crore in January 2008, the market peak. Another interesting sidelight is that some investors did cash out close to, though not exactly at, the market peak. Equity fund redemptions, which began to inch higher as early as May 2007, peaked in October 2007, well ahead of the market peak in January.
That the average monthly redemption stood at about Rs 6,905 crore between April-December 2007, even when equity funds notched up average holding period returns of 73 per cent, suggests that a section of investors does constantly monitor fund portfolios and book profits.
The trend appears to be gathering strength in the recent rally too. Following the broader market rally, the average monthly redemption between May and July 2009 went up to Rs 4,082 crore.
Looking beyond equities
Spurred by the need to make up for the lack of returns in equities, a section of mutual fund investors appear to have ventured beyond equity funds too. A host of other dynamics, such as higher inflation and interest rates in 2008, may also have triggered the flow of funds into other assets.
Income funds, which primarily invest in debt securities with varying maturity periods, reported net outflows in November and December 2007 (coinciding with a rising equity market). However, following the crash in equities, fund flows into income funds turned positive and remained buoyant till the Lehman Brothers collapse in September.
While it can be argued that income funds usually see participation only from the well-informed investors (such as banks and other financial institutions), retail participation in other assets is also evident from fund flows into other categories.
For instance, net inflows into gold ETFs have been rising steadily since the January 2008 crash and 2008 saw gold ETF assets expand by about 54 per cent. Investors also appear to have taken temporary shelter in low-risk gilt and liquid funds in October 2008 following the collapse of equities worldwide. Flight to safer avenues following a liquidity crunch, both domestic and global, may explain the changed stance, especially since the asset classes saw poor inflows in the earlier months.
ELSS funds too saw a change in fund patterns. Being tax-saving instruments, these funds generally tend to report peak flows toward the end of a fiscal year.
In keeping with this, while ELSS funds did report higher net flows in the four-month period between December 2007 and March 2008 (peaked in March with Rs 2,071 crore net inflows), the risk-appetite of investors appears to have fallen sharply since.
The downward spiral in equities in 2008 led to a lower quantum of net flows between January-March 2009 (Rs 547 crore in March 2009). That these funds, notwithstanding the lock-in, saw a pick-up in redemption activity in October 2008 and more recently in June 2009 also points to the reluctance of investors to lock in funds for the long term.
Overseas investing too appears to have lost its charm, what with these funds recording net outflows since October 2008. What’s more, the funds reported a significant jump in net outflows (Rs 127 crore) in May 2009, which also coincided with a broader equity rally.
Spurred by the need to make up for the lack of returns in equities, a section of mutual fund investors appear to have ventured beyond equity funds too. A host of other dynamics, such as higher inflation and interest rates in 2008, may also have triggered the flow of funds into other assets.
Income funds, which primarily invest in debt securities with varying maturity periods, reported net outflows in November and December 2007 (coinciding with a rising equity market). However, following the crash in equities, fund flows into income funds turned positive and remained buoyant till the Lehman Brothers collapse in September.
While it can be argued that income funds usually see participation only from the well-informed investors (such as banks and other financial institutions), retail participation in other assets is also evident from fund flows into other categories.
For instance, net inflows into gold ETFs have been rising steadily since the January 2008 crash and 2008 saw gold ETF assets expand by about 54 per cent. Investors also appear to have taken temporary shelter in low-risk gilt and liquid funds in October 2008 following the collapse of equities worldwide. Flight to safer avenues following a liquidity crunch, both domestic and global, may explain the changed stance, especially since the asset classes saw poor inflows in the earlier months.
ELSS funds too saw a change in fund patterns. Being tax-saving instruments, these funds generally tend to report peak flows toward the end of a fiscal year.
In keeping with this, while ELSS funds did report higher net flows in the four-month period between December 2007 and March 2008 (peaked in March with Rs 2,071 crore net inflows), the risk-appetite of investors appears to have fallen sharply since.
The downward spiral in equities in 2008 led to a lower quantum of net flows between January-March 2009 (Rs 547 crore in March 2009). That these funds, notwithstanding the lock-in, saw a pick-up in redemption activity in October 2008 and more recently in June 2009 also points to the reluctance of investors to lock in funds for the long term.
Overseas investing too appears to have lost its charm, what with these funds recording net outflows since October 2008. What’s more, the funds reported a significant jump in net outflows (Rs 127 crore) in May 2009, which also coincided with a broader equity rally.
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