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Mutual fund or direct investment in stocks? Here’s how young investors altered their course

Mutual fund or direct investment in stocks? Here’s how young investors altered their course

Mutual fund or direct investment in stocks? Here’s how young investors altered their course
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By Surabhi Upadhyay  Jul 8, 2020 11:54:06 PM IST (Updated)

While new-age retail investors may have indeed been lured by the thrill of short-term trading gains, the mutual fund report card hasn’t exactly delivered a glowing performance over the past several years.

The numbers are in, and they don’t look pretty. Net inflows into equity mutual funds have fallen to a record low of just Rs 225 crore in the month of June, a staggering 96 percent drop from May. Largecap and multicap categories have actually recorded net outflows and even the mighty systematic investment plan (SIP) number has fallen to sub Rs 8,000 crore after many months.

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This has happened at a time when the equity market has been in the middle of a robust rally and general market sentiment has been fairly upbeat, courtesy ample global liquidity and the reopening of the economy. The June MF data also comes at a time when retail investor interest in direct stock trading is surging to unprecedented levels.
So what went wrong with mutual funds? Are retail investors altering their vehicle of choice when it comes to the equity market?
Like most things around us these days, this new phenomenon also has a lot to do with COVID-19. With people being forced to stay inside houses and work from home becoming the new normal, the retail investors found themselves with more time in hand and easy access to stock broking, thanks to the new-age tech platforms.
With the market falling like a knife in March when Corona first hit us, Nifty at 7,500 proved to be a comfortable level for many to take the plunge. As V-shaped market recovery gathered momentum, so did trading interest. The evidence lies in the stunning account opening data at stock trading platforms like Zerodha saw a surge in new accounts, mostly coming from tier 2 and 3 cities.
Monthly new account openings in the post-COVID period (March – June) have surged between 128 percent and 255 percent compared to the pre-pandemic monthly average at Zerodha. These new accounts hail from not just cities like Mumbai but also Nasik, Pune, Ghaziabad and Surat.
Meanwhile, equity funds in the same period have witnessed a steady drop in inflows. From a level of Rs 11,485 crore in March, the monthly number has come down to a paltry Rs 225 crore in June. So what has gone wrong?
MFs FALLING OUT OF FAVOUR?
Mutual Fund houses partially attribute the fall to the fact that physical sales have totally stopped due to the pandemic. Funds are being sold only via digital mediums. While that’s a great coming of age for the industry, it’s evident that this is also taking toll on sales. And then there is the factor of human emotion “at a crisis time like this, it is natural for investors to want to hold on to cash and book some profits leading to redemptions,” says Sunil Subramaniam, MD Sundaram Mutual Fund.
Fair point, but then what explains the rush into direct equity? Subramaniam feels the direct stock trading surge comprises mostly of new investors seeking their first thrill in the world of stock markets.
“These are new investors/speculators experimenting with stocks without necessarily thinking about an end goal like retirement. It’s actually good for the MF industry because these first timers will ultimately migrate to mutual funds,” adds Subramaniam.
MFS: A DECADE OF MODEST RETURNS
While new-age retail investors may have indeed been lured by the thrill of short-term trading gains, the mutual fund report card hasn’t exactly delivered a glowing performance over the past several years.
Investors’ frustration therefore is understandable. Sample this – largecap funds have given an average annual return of just 5.3 percent over the last 5 years and a return of 8.3 percent over the last decade.
Multicap funds, a fairly popular category, have given 5 percent return over 5 years and 9 percent over 10 years annually. Investors have become savvy. And they are demanding answers. Why pay a fund manager fee of anywhere between 1.5- 2.5 percent for mediocre returns?
“It’s a question the MF industry can’t shy away from. Active fund performance will have to pick up or else we will see a big move towards passive funds like what has been witnessed in developed markets,” explains Swarup Mohanty, MD of Mirae Asset India.
THE TRADING CULT
With regulation having changed last year and SEBI putting an end to upfront commissions, the mutual fund industry seems to be going through its own churn. Unimpressive returns, the advent of passive investing, an unprecedented pandemic and the investors who are becoming increasingly savvy – it’s a potent mix that has brought the MF industry to the cross roads.
However, while fund houses cope with these challenges, the new-age, trigger-happy traders/investors will have their own lessons to learn. The easy stock market trade is over. When you buy panic and chaos remaining patient, chances are you will make decent money.
And that’s exactly what the March low proved to be – an excellent buying opportunity. But now with the market having already risen substantially over the last few months, for the investors it may not be as simple and easy. So how will the first time direct equity investors fare?
“The new breed of younger investors are investing in good quality companies with very little leverage. I expect them to participate in the market for a long time to come,” points Zerodha co-founder Nikhil Kamath.
They say stock picking is a combination of art and science. Wealth creation and wealth management requires thought, planning and perseverance. The bravado and adrenaline rush for a quick profitable trade can be a great fun but reversals can be equally brutal, and mistakes may prove costly. Coming months’ promise to be a test for both – traditional fund managers and the self-acclaimed direct equity trading mavericks. Let’s see if both win the next round.
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