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Why retail investors are lapping up equity mutual funds on the fall


Stock markets had been trading at lofty levels till late February before falling off a cliff in March.

Why retail investors are lapping up equity mutual funds on the fall
Stock markets had been trading at lofty levels till late February before falling off a cliff in March. Yet, retail investors who invest in stocks through equity mutual funds seem to have shown remarkable patience during the decline, even acting in a contrarian manner – buying when others around them were selling.
While actual flows data for March is awaited, it is likely that the print, when it comes out, will show equity MFs seeing inflows rather than outflows, says Omkeshwar Singh, Head Rank MF of Samco Securities.
One factor that would have helped flows was that March sees inflows into equity-linked saving schemes (ELSS).
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"But new investors have also got into the markets due to attractive perceived valuations of equity markets," Singh says.
Markets fell about 30 percent in March but Harsh Jain, Founder and COO of Groww, says that instead of hitting the pause button on their investments, investors actually invested more.
“On the day of big market declines, we witnessed a huge jump in inflows and the number of users who invest in equities,” Jain adds, adding that equity investments on Groww grew 15-20 percent since the second week of March.
The behavior of retail mutual fund investors is quite odd as they are generally perceived to be more impatient than seasoned professional investors.
But the fact that they are holding on to their investments would suggest “developed a better understanding” of how to invest in equities, says Vijay Kuppa, Co-founder, Orowealth.
"They see markets decline as a brilliant time to invest, further enabling them to generate superior returns over a period of time. This is the main reason why we are witnessing more participation of investors in equities," he explains.
According to Kuppa, there were few SIP cancellations in March, a trend he calls “surprising but very good”.
Further, the fact that investors are seen as selling some portion of their debt portfolios and reallocated them to equities is a classic allocation technique advocated by core financial planning principles.
For instance, Rs 100 invested 50:50 in debt and equity would become 40:60 if the stock portion fell 30 percent and the debt portion returned 2 percent: Rs 35 in stocks and Rs 51 in debt. It would then be prudent to sell off some of the debt portion and reinvest the money in equities to bring the asset allocation back in balance.
There is, however, another trend, when it comes to equity investments that could potentially be a cause of worry.
There is some evidence that many investors exited their equity portfolios only to re-enter at lower levels in March, which would be termed as an act of investors trying to time the market.
There could be several reasons for this. Many investors who have successfully made money in the bull market of the last several years would try and replicate their success.
But Sousthav Chakrabarty, CEO and Director, Capital Quotient, advises against this.
"There are certain challenges in this execution, such as identifying false alarms during a market correction,” he says. Case in point: investors who may have bought in 2008 when the market fell 30 percent, thinking stocks were now cheap, would have taken another 50 percent hit till they bottomed out.
Besides, taking a market call on whether stocks have become cheap means investors are themselves “trying to analyse the global and domestic impact on the economy during the current COVID-19 scenario” says Chakraborty, something that goes against the principles of mutual fund investing and asset allocation.
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