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Understanding Investment Patterns

Investment patterns show that while smaller investors go long-term in equity funds, HNIs are short-term investors

Some time ago, the Association of Mutual Funds In India (AMFI) released data on the investment patterns in mutual funds as it stood at the end of the 2011-12 financial year. The data comprises of the breakup of the amount invested in funds, sliced according to type of mutual fund, the type of investors as well as the age of investments. The funds are classified across Liquid & Money Market, Gilt, Debt Oriented, Equity Oriented, Balanced, Gold ETF, Other ETFs, and Fund investing Overseas. The types of investors are broken up across Corporates, Banks/FIs, FIIs, High Networth Individuals (HNIs) and Retail. Of course HNI is also retail but AMFI classifies them as those with single transactions of more than Rs 5 lakh. The time periods along which the data is broken up into periods with the boundaries at three months, six months, one year and two years.

The data offers some very interesting and useful insights into how Indians invest in mutual funds. Speaking about equity funds for the moment, for my money, this is the headline conclusion: HNI investors are overwhelmingly interested in short-term investments while smaller retail investors invest for the long-term. The difference is not minor. 33 per cent of HNI equity money is of less than one year duration as opposed to 20 per cent of retail money. In the one to two year range, HNIs have 27 per cent while smaller investors have 18 per cent. For more than two years investment horizon, HNIs have 40 per cent while retail investors have 62 per cent.

On the face of it, this is surprising. A naïve analysis would assume that HNIs would have superior access to better quality advice and would also make a greater effort to manage their investments well. They should also have uninterrupted availability of savings for longer stretches of time. Therefore, they are the ones who should be more committed to longer-term equity investments. The truth is the opposite, and sharply so.

Why is this so? One possibility if that HNIs use equity mutual funds as a substitute for equity itself. They trade in and out of equity funds based on their expectations of where the markets are going, trying to time the rise and fall of NAVs. Retail investors, by contrast, just put in their money, or start their SIPs and then let them be for long periods of time, as it should ideally be.

Paradoxically, the driver behind this could be the difference in the amount and the kind of attention that the two types of investors are getting from financial advisors or wealth managers or whatever else the people serving HNIs are calling themselves nowadays. Because HNIs expect more service, they get more advice, which must eventually translate, into more activity and thus more transactions. The final result is shorter holding periods and poorer outcomes.

In contrast, small retail investors probably tend to be left to their own devices by fund distributors and the wealth management sorts are not interested in them anyway. It’s rather like the contrast between pampered rich kids whose every need is looked after and working class kids who learn to fend for themselves.

From the fund companies’ perspective, this data shows that retail investors are probably an under-served lot. From a commercial point of view, it’s vastly better to have equity money that stays for long periods of time rather than money that floats in and out depending on the season. Besides HNIs, fund companies must also question the value of the large amount of very short-term corporate investments they manage in the shorter-term debt funds (65 per cent of the total).

However, all this aside, I must say that as a long-term watcher of mutual funds, the total quantum of equity assets is a disappointment. Two long decades ago, UTI’s Mastergain fund collected Rs 4,472 crore in its NFO. Extrapolating from that number, today’s Rs 2 lakh crore of equity assets must be counted as a disappointment. But that’s a different story.