As the Indian cricket team reached the pinnacle of the ICC Test Rankings, a certain statistic in a newspaper caught my eye. It said that Dhoni has a 100% win record as Indian Test captain. That sounds highly impressive, doesn’t it? But probe a bit deeper and you come to know that Dhoni has captained the team in only 10 Test matches as yet. While nothing can be taken away from his leadership qualities, it can be said that numbers can often be misleading. When we look at numbers from just the top, we often miss out on the real picture.
The same happens with retail equity fund investors. Newspapers of late have been running headlines about the inflating size of the fund industry’s assets under management. From Rs 6 lakh crore in May, to Rs 7 lakh crore in August to Rs 8 lakh crore in November, these numbers seem so impressive that any lay investor can be forgiven for thinking that people are putting in huge amounts into funds once again. However, that is not really the case. Let me explain why.
Basically, the Indian mutual fund industry is made up of two very distinct industries within itself. First is the wholesale debt fund industry (where the money comes largely from corporate companies) and then there is the retail equity fund industry (where the money comes largely from individual investors). Of course, there is an overlap of the two parts, but in context of the total AUM, this overlap is of a minor quantity.
Over the past few years, the wholesale debt fund industry has come along quite well. In 2004, the size of this industry was about Rs 1.15 crore. It has reached Rs 5.9 lakh crore now, a growth rate of almost 40% a year.
During this same time, the retail equity fund industry grew at a rate of about 50 % a year, from Rs 25,000 crore in 2004 to Rs 1.9 lakh crore now. This statistic, by itself, is fairly impressive. But when we probe further, we find that picture to be not so rosy because during this time the markets grew by 3.5 times, taking the Sensex at the floor level. Compare this to the equity fund industry’s growth of 2.4 times, and it becomes clear that the holla created over reaching Rs 8 lakh crore doesn’t paint the right picture.
The reason behind this is the investor behavior towards market gyrations. When the markets rise, everyone starts investing money, when the markets fall, everyone sort of hangs around, waiting and watching, and when a slight recovery is seen, everyone redeems their investments to avoid further losses. I have written about the futility of this investment approach a number of times. And the fact that the equity fund industry has grown so sluggishly can also be attributed to this approach.
For example, in February 2009, equity fund assets were at Rs 1.09 lakh crore. They rose to Rs 1.44 lakh crore in May 2009. Had the equity fund industry’s growth been in line with that of the markets, then the assets should have been at Rs 1.8 lakh. The missing Rs 36,000 crore is the amount that was redeemed by investors in a hurry. No wonder the funds underperformed the markets.
We are partly to be blamed for the equity fund industry’s sluggish growth, but we are completely at blame for the underperformance of our own portfolios. Had you stayed invested and not redeemed when the markets rose, then today your investments would have certainly been worth more than what you got. And therein lies the lesson that all investors need to learn.
The same happens with retail equity fund investors. Newspapers of late have been running headlines about the inflating size of the fund industry’s assets under management. From Rs 6 lakh crore in May, to Rs 7 lakh crore in August to Rs 8 lakh crore in November, these numbers seem so impressive that any lay investor can be forgiven for thinking that people are putting in huge amounts into funds once again. However, that is not really the case. Let me explain why.
Basically, the Indian mutual fund industry is made up of two very distinct industries within itself. First is the wholesale debt fund industry (where the money comes largely from corporate companies) and then there is the retail equity fund industry (where the money comes largely from individual investors). Of course, there is an overlap of the two parts, but in context of the total AUM, this overlap is of a minor quantity.
Over the past few years, the wholesale debt fund industry has come along quite well. In 2004, the size of this industry was about Rs 1.15 crore. It has reached Rs 5.9 lakh crore now, a growth rate of almost 40% a year.
During this same time, the retail equity fund industry grew at a rate of about 50 % a year, from Rs 25,000 crore in 2004 to Rs 1.9 lakh crore now. This statistic, by itself, is fairly impressive. But when we probe further, we find that picture to be not so rosy because during this time the markets grew by 3.5 times, taking the Sensex at the floor level. Compare this to the equity fund industry’s growth of 2.4 times, and it becomes clear that the holla created over reaching Rs 8 lakh crore doesn’t paint the right picture.
The reason behind this is the investor behavior towards market gyrations. When the markets rise, everyone starts investing money, when the markets fall, everyone sort of hangs around, waiting and watching, and when a slight recovery is seen, everyone redeems their investments to avoid further losses. I have written about the futility of this investment approach a number of times. And the fact that the equity fund industry has grown so sluggishly can also be attributed to this approach.
For example, in February 2009, equity fund assets were at Rs 1.09 lakh crore. They rose to Rs 1.44 lakh crore in May 2009. Had the equity fund industry’s growth been in line with that of the markets, then the assets should have been at Rs 1.8 lakh. The missing Rs 36,000 crore is the amount that was redeemed by investors in a hurry. No wonder the funds underperformed the markets.
We are partly to be blamed for the equity fund industry’s sluggish growth, but we are completely at blame for the underperformance of our own portfolios. Had you stayed invested and not redeemed when the markets rose, then today your investments would have certainly been worth more than what you got. And therein lies the lesson that all investors need to learn.
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