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Selling On The Rebound

Investors seem to have finally lost faith in the markets & even long-term investors are pulling out now

Compared to direct equity investors, mutual fund investors have a far lower tendency to cut and run when the going gets tough. Along with the stock markets, mutual fund NAVs too have been on roller coaster ride since mid January. Initially, when the fall began, many observers expected fund investors to start redeeming their money. People in the fund industry as well as the media expected redemptions to come in a flood if the market fell beyond a point. Curiously, this didn’t happen during the first wave of the crash when the markets fell 29 per cent between January 11 and March 17. Then stocks started rising for a while and recovered about half of the lost ground by May 2. Then, they crashed again and dropped by 29 per cent by July 16. This added up to a drop of 40 per cent. Remarkably, there was no great wave of redemptions in mutual funds even then. It seemed that a large mass of investors had seriously taken the long-run mantra for investing. Come hell or high water, they were going to stick to their beliefs.

And then a strange thing happened. The stock markets rose again and this time, fund investors started redeeming. After the Sensex has risen from the 12,000 levels back to the borderline between 14,000 and 15,000, money has started flowing out of mutual funds. Interestingly, there is some psychology at work here which has also affected direct equity investors. When the stock markets were really down in the dumps in mid-July, it was a common refrain among the investing community that all the selling was over. ‘Anyone who was going to sell has sold and gone. Only the real long-term investors are left now,’ was the sentiment that one heard very often. It sounded logical.

After all, if anyone had invested money for short-term gains, why would they stick around even after stocks had fallen 40 per cent or more. Many of the previously hot-performers had fallen far more. In the much vaunted real-estate sector, even the big names had fallen by about 75 per cent at the worst point. It was unimaginable that anyone who was in stocks for any kind of quick gains would swallow such disastrous losses and still not sell. The wisdom of the day was that all the selling was over.

As it turned out, it wasn’t. When stocks started rising again in July, a curious thing happened. People started selling. Even in mutual funds, where no one expected it. During July, even as the Sensex rose about seven per cent and the average diversified equity fund earned returns of about five per cent, the quantum of money being managed by such funds fell by about nine per cent. While the exact figure is not known at this point, this data means an estimated redemption of 11 to 15 per cent, or about Rs 15,000 crore to 21,000 out of Rs 138,000 crore. That’s a lot of money being pulled out by investors.

What happened? I think many investors who were previously willing to stick it out are now finally disillusioned. When the market was at its bottom, they were disheartened and were in a frame of mind where they were saying to themselves, “This is over, and I’ll pull out if it gains even a little bit.” Now, it’s gained that little bit and they are moving out with a vengeance.

Is this an understandable emotion? Yes it is. Is it the right thing to do? Well, it’s not a bad time to get rid of the dud stocks you had. However, if you’re pulling long-term money out of good stocks and mutual funds, then it’s yet another attempt to time the markets on the basis of an emotional response. It won’t work.