For the last few months, the funds flowing into equity mutual funds have been on a decline. Even when stocks were on a roll, people were redeeming more than they were investing in equity funds. In the months since August, the net outflow from equity funds was Rs 5,600 crore. More importantly, there hasn't been a single month that there has been a net inflow into equity funds. Now, when the stock markets have gone into retreat, the outflow will probably be even sharper. There are many reasons for this lack of interest among investors, but it definitely appears that the abolition of entry load by the Securities and Exchange Board of India (SEBI) has played a role.
Since August 1, mutual fund distributors are getting paid a lot less to sell funds than they were earlier. Many of them have simply stopped selling funds and have switched to alternatives, perhaps to selling unit-linked insurance plans (ULIPs). Much has been said over the last six months about the impact of the abolition of entry loads since this decision was announced, but it does seem that SEBI's decision may have led to a substantial setback to the mutual fund industry in India.
As a fund investor, this may not be of any immediate concern to you. However, it is true that people invest most in what they are asked to invest in. In other words, sales and distribution matter. If fewer (or none) distributors approach us to invest in funds, then many of us will invest less (or no) money in equity funds. This is something that any knowledgeable investor should guard against. Over the last two decades or so, an investment strategy that involves putting in a steady amount of money regularly into equity funds has flat-out been the best way open to an individual to generate serious wealth with the minimum of knowledge and no expertise.
Moreover, these returns have been available through an asset type that is way ahead of alternatives in terms of liquidity and transparency, as well as zero long-term capital gains tax. If we consider all possible five-year periods in the last 10 years, then the lowest returns that the average large-cap equity investment would have got you is 25 per cent. At the deepest point during the last year's crash, the five-year returns did not drop below 55 per cent. And mind you, this was at a point from which equities doubled quickly. In a period that contains all manner of strife and crashes, getting this from an investment that can be encashed at two days’ notice without any tax hit on the returns is all that an investor can ask for.
For an investor who would steadily invest in a monthly systematic investment plan (SIP), the returns would always be fabulous. An SIP started in 2000 would today have returns of 18.6 per cent, despite two big market crashes. In fact, it's these intervening crashes which make these returns so attractive. However, as I said, all this is under a cloud today. This investment avenue will still be available, but it's unlikely that anyone will come and hard-sell it to you. Unless investors keep a clear-head and stay focused on the inherent characteristics of the investments that are available, they'll end up selling themselves short. Contradictions in the way financial products are regulated in India have ensured that the investing public of the country will not be actively sold the better class of investments. Most of them won't understand enough to avoid this trap. However, those who understand what's going on owe it to themselves to make the right choice.
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