What’s keeping equity MFs young?

“In the long run we are all dead,” said economist John Maynard Keynes more than half a century back.

The financial world has been rediscovering Keynes over the last two years, and the Indian mutual fund (MF) investor is no exception.

Of the Rs 1,77,697.4 crore invested by retail and high networth individuals in equity MFs as on September 30, 2009, only Rs 86,447.4 crore, or 48.4%, has stayed invested for more than two years. The remaining Rs 91,250 crore has been invested over the last two years, data released by the Association of Mutual Funds in India revealed.

Retail and high networth individuals comprise nearly 98.5% of the total investors in MFs.
The data clearly suggests that most investors do not hold on to their equity MF investments for a long term, as fund managers in the MF industry have always advocated.

A primary reason for this low duration is that MF distributors used to earn more by getting the investor to churn. By getting the investor to exit one MF and put the money into another, the distributor could get a commission of 2-3% of the amount invested. In comparison, if he just allowed the investor to stay in the original MF, he would get a trail commission, which typically is less than 1%.

“Churn was happening significantly in the past. Hopefully, with the revised norms, the churn would reduce,” said the head of a foreign fund house not willing to be named.
The Securities and Exchange Board of India recently banned MFs from charging entry loads from investors. An entry load of 2.25% of the amount invested was charged from the investor to pay commission to the distributors.

As per the new norms, no entry load can be charged and the issue of commission has to be sorted out between the distributor and the investor.

Jayant Vidwans, a financial planner who runs Chaitanya Financial Consultancy, said “About 99% of the investors are not aware of churning.”

“When investors come to us, we tell them that they should invest in MFs only if they want to stay invested for more than three years. If they want to invest for one year, they should go for fixed deposits (FDs). If you compare my assets under management with most asset management companies, it stays for 900 days on an average,” he added.

The MF industry agrees with these findings.

“The average duration of investments in MFs is under two years, and typically around one year. If one sees FDs, the maximum FDs were for the 1-year tenure. It is more of an investment horizon that people have and it still continues,” Arindam Gosh, CEO, Mirae Asset Global Investments (India), said.

The topsy-turvy market movement also impacts the tenure of investment, say experts.
“Typically when the markets are doing well, people tend to invest and withdraw when they are moving down. That way, they don’t make optimal gains and say that I have not made higher gains,” Krishnan Sitaraman, director - fund services and fixed income research, Crisil, said.  

“People should put in money when the markets are down, so that when the markets turn, you get better returns,” Sitaraman said.

The industry agrees that it is in the investor’s interest to stay invested for a longer period.
“As far as equity MFs are concerned, investors should invest regularly for a long period of time, so that the upside and downside even out. Don’t invest large sums of money at a single stroke because in such a case, timing has a critical bearing on the returns they get,” said Sitaraman.

Not just investors, but the MF industry too is seeking longer-duration funds. Asked whether the industry would like to have funds for a longer tenure, Ghosh said, “Of course, there is a considerable cost of acquisition and the longer the client stays the better and profitable it is for both. Equity as an asset class is such that only if he stays in longer will one benefit.”