Be a buy-and-hold investor in MFs

Sebi’s Investor Survey highlights need to invest according to risk appetite and investment horizon

The SIP (systematic investment plan) culture has taken firm root among mutual fund (MF) investors in India; more and more security market investors are using MFs rather than direct equities. But as markets regulator Securities and Exchange Board of India’s (Sebi’s) latest Investor Survey (2015) shows, there are many misconceptions that non-investors harbour about mutual funds. These in turn prevent them from utilising the wealth creation potential of MFs.

First, a look at the positives thrown up by the survey. MFs have become more popular (66 per cent) than direct equities (55 per cent) among those who already invest in the securities markets. This may be attributed to the Association of Mutual Funds in India’s (Amfi’s) drive to popularise funds. Also, nearly 60 per cent of regular MF investors use SIPs.

On the negative side, however, the survey highlights that even among urban respondents, awareness about MFs (28.4 per cent) and their usage (9.7 per cent) is far lower than is the case with bank deposits, life insurance, post office savings, real estate, precious metals, and so on. “Only a fraction of those who are aware about MFs invest in them. For this figure to go up, trust in advisors needs to increase,” says Ranjit S Mudholkar, vicechairman and chief executive officer, Financial Planning Standards Board India.

The primary reason households, which don’t invest in MFs, cited was concern about safety of investments. Says Kaustubh Belapurkar, director-manager research, Morningstar Investment Advisor India: “To mitigate risk, investors need to know which funds to invest in based on their risk appetite and investment horizon. If their risk appetite is high and they can invest for five-seven years, they should opt for equity funds. If not, they should stick to debt MFs.” Portfolio diversification is another tool investors should use to reduce risk. “Early investors should avoid over-exposing themselves to equity market risk. They should spread their portfolio across equity, fixed income and liquid funds,” Mudholkar says.

The survey also highlights that investors expect future performance to exactly mirror past successes and failures. Experts say investors need to be made aware about the law of mean reversion. An asset class that has outperformed in the recent past will not always continue to do so. The same goes for an asset class that has underperformed. “Investors should go more by long-term average return to estimate what returns they can expect from a particular type of MF,” says Vipin Khandelwal, a Sebi-registered investment advisor who also runs Unovest, a platform for investing in direct funds.

Another interesting finding relates to the holding period of MF investments. While a high percentage (58 per cent) of investors claimed to hold their MF investments in times of market volatility; in reality their holding period was very short (see table). “When people start investing, they churn their MFs a lot. Many investors treat MFs just like stocks, thinking that these need to be traded and actively managed. It is only later that they settle down and start investing for the long term,” says Khandelwal. “Many people are also impatient. As soon as they see that the fund has gone up 30-40 per cent, they think it is time to book profits. Investors also sometimes depend on star ratings. When they see that a fund has acquired a five star rating, they switch from their lower-rated fund to the five star fund,” he adds. In the process, they at times end up paying tax and exit cost, and also enter a five star fund just when its hot streak is coming to an end.