The headlines are unequivocal. "Mutual fund inflows set for a record." "Highest ever inflows into equity mutual funds." "Mutual funds see inflow of ₹56,000 crore in equity schemes." And so on. It does look like that by the time this financial year ends, well above ₹2 lakh crore would have flown into Indian mutual funds. Equity inflows may well touch ₹70,000 crores for the year, or possibly even higher. That's great news. Or, maybe it isn't. It's certainly great news from the perspective of the mutual fund industry. More assets means more revenue and profits, and the expenses that fund companies can effectively charge on equity assets are now significantly higher than what they were till a couple of years back.
However, this wave of renewed interest in fund investing at this particular point of time isn't great news for those who are investing in them. It's pretty clear that what is happening is that investors are pouring in money into equity mutual funds after the equity markets have gone up sharply.
The ideal way to invest would have been to have been investing steadily throughout the last few years, when the markets were drifting around. Investors who did that have reaped rich rewards over the last year.
In sharp contrast, when you look at the inflows into equity funds, a high proportion of investors have set themselves up for relatively poor returns. Actually, the problem is not just that these investors have come in after the markets have risen, but that this tells us that a large proportion of this money may have come from investors who think that equity mutual funds are some sort of a short-term trading option which should be used to time the markets. This hot money has come in when the markets have gone up a lot, but will also go out whenever it has a hiccup. In effect, these traders would have bought high and sold low, which is obviously the exact opposite of the way good returns can be generated.
While it's good that a lot of people are investing into mutual funds, one just hopes that a good proportion of this money is not just there to try and do some short-term tactical investing that will eventually backfire.
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