Investment in Equity Mutual Funds in volatile or falling markets is considered as taboo by most of the investors. The general perception among investors is that recession is going to lead to further falls hence eroding the value of their money. Moreover the fear psychosis becomes so huge that investors go ahead with redeeming their equity investments at losses and parking their remaining money in low risk fixed return instruments. Recent example is the case of Indian Mutual Fund Industry where more than 1 million folios were closed in the last one year.
Time and again we keep on reading articles explaining the under mentioned benefits of Equity Mutual Funds:
- Equity is a long term investment option.
- Equity Mutual Fund investment shouldn’t be done from a speculation point of view.
- Equity is beneficial from Tax point of view as it doesn’t incur long term capital gain tax after 1 year of investment.
- Long term returns from Equity are always more than inflation.
Despite of all these benefits published and explained time and again retail participation in Equity is still meagre. Three major factors affecting the growth of retail participation in Equity:
1.) Stringent SEBI regulations for Mutual Fund Industry: It started with banning the entry loads on Mutual Funds in year 2009. This led to a sudden decline in revenues for AMC’s and thereby reduction in the distributor commissions. Many of the small distributors shut shops as they couldn’t make for their expenses. Many financial advisors refrained from aggressive distribution of MF’s and promoted Insurance and Real estate solutions where margins were higher. Most of the distributors found it very difficult to service their customers given sudden cut down in their commissions. This led to a sharp decline in flow of money in MF’s.
2.) Lack of right advisory: Very few distributors have really worked on the advisory model. The investors were never really advised on their investments based on their needs. Funds were pushed citing their benefits and not as per the investors requirements. The good schemes gave smiles to the investors and the bad ones left them clueless with no option but to redeem their funds by booking losses. Also they were never advised rightly during panic redemptions at the time of economic slowdowns as a result booking losses on their investment.
3.) Investors Panic: Panic comes hand in hand with a meltdown. Any bad news or any market meltdown sends shockwave among the investors. Investors need to understand that Equity is a long term product and euity investment needs to be disciplined. Discipline needs to be similar to what is maintained when somebody invests in a PPF or NSC etc and forgets about the money till the maturity. The underlying basis of investment in Indian Equity market is the India growth story. Though India has been facing a slowdown from some time the consumption story still remains intact. A disciplined investment shall pay in the long run and a meltdown shouldn’t be always taken with a panic. It is important to note that since year 2004 the 5 to 7 year rolling returns of BSE Sensex have always been positive. SEBI’s ban on Entry Loads has been an investor friendly step and Mutual Funds as of now are the cheapest and most tax efficient products in the market from a long term investment perspective.
Time and again we keep on reading articles explaining the under mentioned benefits of Equity Mutual Funds:
- Equity is a long term investment option.
- Equity Mutual Fund investment shouldn’t be done from a speculation point of view.
- Equity is beneficial from Tax point of view as it doesn’t incur long term capital gain tax after 1 year of investment.
- Long term returns from Equity are always more than inflation.
Despite of all these benefits published and explained time and again retail participation in Equity is still meagre. Three major factors affecting the growth of retail participation in Equity:
1.) Stringent SEBI regulations for Mutual Fund Industry: It started with banning the entry loads on Mutual Funds in year 2009. This led to a sudden decline in revenues for AMC’s and thereby reduction in the distributor commissions. Many of the small distributors shut shops as they couldn’t make for their expenses. Many financial advisors refrained from aggressive distribution of MF’s and promoted Insurance and Real estate solutions where margins were higher. Most of the distributors found it very difficult to service their customers given sudden cut down in their commissions. This led to a sharp decline in flow of money in MF’s.
2.) Lack of right advisory: Very few distributors have really worked on the advisory model. The investors were never really advised on their investments based on their needs. Funds were pushed citing their benefits and not as per the investors requirements. The good schemes gave smiles to the investors and the bad ones left them clueless with no option but to redeem their funds by booking losses. Also they were never advised rightly during panic redemptions at the time of economic slowdowns as a result booking losses on their investment.
3.) Investors Panic: Panic comes hand in hand with a meltdown. Any bad news or any market meltdown sends shockwave among the investors. Investors need to understand that Equity is a long term product and euity investment needs to be disciplined. Discipline needs to be similar to what is maintained when somebody invests in a PPF or NSC etc and forgets about the money till the maturity. The underlying basis of investment in Indian Equity market is the India growth story. Though India has been facing a slowdown from some time the consumption story still remains intact. A disciplined investment shall pay in the long run and a meltdown shouldn’t be always taken with a panic. It is important to note that since year 2004 the 5 to 7 year rolling returns of BSE Sensex have always been positive. SEBI’s ban on Entry Loads has been an investor friendly step and Mutual Funds as of now are the cheapest and most tax efficient products in the market from a long term investment perspective.
