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Who Says Retail Investors Are Short-term?

Recent AMFI data shows that 62 per cent of retail investors in equity funds have stayed on for 2 years or more

It seems to be a case of viewing a glass which is half full as half empty. With AMFI putting out its latest dataset on average holding periods for mutual fund investors, news articles have lamented that 'over half of equity fund investors' exit within two years.

True, AMFI data as of December 2014 show that only 45 per cent of all the investors in equity funds had stayed with their schemes for more than two years. So yes, 55 per cent jumped ship within two years.

Now this will probably have fund houses which have been launching three-year close end NFOs pat themselves on the back. "See, we told you that Indian investors aren't long-term. If you don't lock them in, they will book profits too soon."

Big investors are short-term
But if you dig a little deeper into the data, you find that this isn't true. For one, while 45 per cent of all categories of equity fund investors redeem within 2 years, retail investors in these funds have proved far more long-term. December 2014 data show that 60 per cent of retail investors in equity funds (retail being investors who have less than Rs 5 lakh invested), have stayed on for more than 2 years.

The investors who were in a hurry to book profits were not 'uninformed' retail ones, but corporates (72 per cent of them exited within 2 years), Banks (95 per cent exited), FIIs (63 per cent) and high net worth investors or HNIs (72 per cent).

Retail investors (only 40 per cent booked profits within 2 years) were by far the most patient of the lot.

Now, given that corporate treasuries or banks may not have much justification to invest in equity funds in the first place (why would you park treasury surpluses in equities?), there's no need to worry about their short-termism or otherwise.

No bull market effect
It is also a healthy trend that the holding periods of retail investors have not dramatically shortened in this bull market. The proportion of retail investors who have held on to their equity schemes for over 2 years has not fallen too drastically between September 2013 (68 per cent) and December 2014 (62 per cent).

One should remember that September 2013 represented the This shows that though a small proportion of investors have hurried to book profits after equity fund returns of 70-100 per cent in the last one year, a majority haven't given in to the temptation.

In the six years to September 2013, retail investors may have been quite frustrated with the poor returns from equity funds. Therefore, they may have been forgiven for booking profits quickly when the markets turned around to give a stunning return within two years. But the data show that this didn't happen. Most retail investors (nearly two-thirds of them) continued to hold on to their equity funds.

Therefore, contrary to the concerns raised, the latest AMFI data actually shows that a majority of retail investors aren't really dummies or even short-termist in their approach to equity funds. That's something for fund houses launching close end schemes to ponder over.