Last year, retail investors re-emerged as a force to reckon with as they invested in a big way in mutual funds. So much so that domestic equity flows acted as a counterbalance to volatile FII flows in equity in 2017.
Overall equity funds (diversified equity funds, equity ETFs, ELSS) received inflows of close to Rs 1.83 lakh crore. Balanced funds received another 84,000 crore.
Systematic investment plans, or SIPs, were the flavour of the season, with close to Rs 60,000 crore coming in through the SIP route in 2017. The monthly SIP numbers are in the region of Rs 6,000 crore which provides a sizeable floor level for domestic flows.
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Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser, posed a question to Prashant Jain and Sankaran Naren on this subject at the Morningstar Investment Conference which was held in October in Mumbai.
In a poll of conference participants, 30% of the respondents indicated that they are moving money from fixed income to equities. Purely in terms of flows, does that worry you?
The mistake many of us make is that we only talk of the numerator and forget the denominator. It's wrong to assume that the investors investing in mutual funds are not intelligent or not being properly advised, and are not getting their asset allocation right.
The Rs 20,000 crores a month coming into mutual funds is $3 billion, amounting to $36 billion a year. India is a $2 trillion economy. The pool of household savings is $500 billion a year. So, this flow of money into equity and balanced funds is about 6-7% of household savings. That's a very sensible and conservative asset allocation.
I see nothing wrong if someone starts investing 20-30% of money in equities, and we are still below that. Mind you, this is on a flow basis, not of the total wealth generated over last 20-30 years. So this notion that Rs 20,000 crores is very risky is wrong and incorrect.
Having said that, when millions invest, it is likely, though not desirable, that maybe 5-10% are coming into equities with not the best understanding or advice.
But by and large, we are moving in the right direction. I find the understanding of equities as a long-term asset class which is risky in the short term common knowledge nowadays. So I'm not worried with what is going on right now.
Prashant Jain, Executive Director & Chief Investment Officer, HDFC Mutual Fund
A lot of first-time investors are coming into balanced funds or asset allocation funds. Do you think they understand the risks? And is there a risk that that money could move out in a hurry?
After 2011, there has not been a down year in the market. Consequently, when I interact with investors I realise that they see equity as a not-so-volatile asset class; and the next 5 years could prove them wrong.
Investors should know that if they invest in an equity or balanced fund, there is a certain risk. Whether that risk is known to all the customers or not is the question.
That's why we tell people, depending on where you are on the risk scale, go downwards and invest in a balanced fund if you want to take slightly lower level of risk. But challenges exist; because if we're getting such a huge increase in the flows, I'm sure a lot of it is coming from people from fixed income.
The return part of it is not a problem, because most of the people who are entering the market today are coming from a fixed income mindset. Equities, when it delivers, delivers much better than debt returns. The risk is a problem. Look at the equity market cycles and you will see periods of time when the market goes down. And today, I would say at least 50% of the mutual fund investors haven't seen a down cycle in equities. Those who invested in mutual funds in 2011 and 2008 won’t have a problem, but a number of them have come after that. This is the reason we have being marketing the more defensive products.
Sankaran Naren, Executive Director & Chief Investment Officer, ICICI Prudential Mutual Fund
