Mass exit by small investors

High volatility in stock prices and resultant erosion of wealth in mutual funds has forced as many as 16 lakh investors operating through systematic investment plans (SIP) to close their accounts.

This exodus has taken place over the last year alone by investors who have been putting monthly recurring deposits with mutual funds to buy stocks spanning over a longer period to make money.

But with all calculations going haywire and fund managers remaining ineffective to provide expected returns, investors who are now looking for short-term returns are shifting their funds to secured and high-yielding modes of investment such as bonds, bank deposits, bullion and even real estate.

Last year, Indian stocks lost nearly quarter of their value due to a prolonged bearish market and overall grim economic outlook in India and abroad.

"Most SIPs happened between 2006 and 2008. Those who started in 2007-08 are mostly into losses because the market has been in a bad shape. People who are constantly witnessing value erosion have no motivation to stay invested," said Waqar Naqvi, chief executive officer (CEO), Taurus Mutual Fund, one of India's fastest growing asset management companies with over Rs.5,000 crore under management.

According to rough estimates, there could be over 1.5 crore SIP accounts opened with 40 mutual funds operating in India and the reported 16 lakh SIP account closure in 2011 accounts for nearly 10 per cent of this segment.

"Most retail investors have lost faith in the capital market. SIPs are the last to exit. Investors are exiting because there has been no capital protection in India. Currently, all policies are pro derivatives and investors are not comfortable with derivative stocks where fluctuation is very high," said Kishor Ostwal, chairman and managing director (CMD), CNI Research.

"Investors do not like to risk their hard-earned money in a market which could be easily rigged. On the other hand, people are witnessing value appreciation in gold and real estate. Thus, they have shifted," Ostwal added.

Another factor in the fast depletion of SIP investment is the drastic reduction in the number of distributors of mutual fund products. Many investors have stopped paying due to absence of service from distributors said officials.

"Due to the hefty upfront commission offered by industry players, many unscrupulous distributors had opened fraudulent SIP accounts and soon after pocketing the commission, the accounts were made to close down causing loss to the industry. The industry must stop this practice immediately," said an industry official asking not to be named.

Investors are lured by the exceedingly high performance of other asset classes. Last year, gold prices appreciated by over 30 per cent and real estate prices, barring metros, have been on a constant rise. This has opened up investment opportunities for people, said experts.

Apart from this, debt investments such as fixed deposits and bonds have become attractive of late where there has been a guarantee in return as against the uncertainty in equity investments. The bonds issued by public sector and private enterprises have been sold out in the recent past due to a trust deficit in the capital market.

Whatever may be the reason, investors are fast losing confidence in the capital market and unless Securities and Exchange Board of India (Sebi) brings in radical reforms, they would hardly return.

Source: http://indiatoday.intoday.in/story/mass-exit-by-small-investors/1/172444.html