‘Savers are slowly understanding mutual funds’ said K V Kamath at the Business Standard BFSI Insight Summit last month. I was reminded of an incident that happened almost 30 years ago.
I was based out of Chennai and I had the habit of visiting a neighbourhood investment advisory outlet that stocked IPO forms for up and coming public offers. The forms, more than 40, of them were nicely arranged almost like newspapers in a newspaper vendor stall. I was slowly going through the forms, trying to remember the IPO reviews I had read in the business dailies. I noticed an autorickshaw pulling to a halt outside this outlet. The autorickshaw driver got out and rushed into the outlet. He saw me looking at the forms intensely and asked me ‘Yedhula podalam saar’ [In what should I put my money]. I realized that this young man had no clue about share market or investing. He probably saw IPO investing equivalent to buying a lottery ticket. I could not hold myself and told him ‘Lottery ticketla pooduya’ [Put your money in a lottery ticket]. He cursed me and left the outlet to look for his next ‘savaari’.
Those were the days of the Harshad Mehta boom. IPOs were oversubscribed by a large margin and getting allotment was like winning a lottery. A number of naïve investors rushed in like my autorickshaw driver friend. Only to exit with nothing in their pocket.
Due to these boom and bust days of the Indian stock market the common investor was always very wary of investing in stocks and shares. Mutual funds too suffered a big set back when Unit64 suffered a meltdown and a number of investors who had parked their money in U64 had to suffer a huge loss.
There is also the problem of herd mentality as far as stock market investing in concerned. When the index rises, small investors rush in. When it falls, they stay away. Some of them panic and sell. But Behaviour Economics tells us that small investors don’t sell when they should because they suffer from what is known as ‘Loss aversion’. Experiments have demonstrated that we tend to value something in hand as a lot more than something that we don’t have. We hate to book a loss on a share. And we end up holding on to dud shares for a lot longer than we should.
This is where a mutual fund and a professional investment manager scores over an individual investor. The fund manager is dispassionate about buying and selling. They may have some favorites but they go by the fundamentals. And they almost always perform better than the lay investor [experts tell me that simple Index funds often perform better than schemes managed by experts].
The other problem is that investors come when the index rises. And they stay away when the index falls. Association of Mutual Funds in India [AMFI] has done a stellar job in spreading the mutual fund culture. Their campaign tag line ‘Mutual Fund Sahi Hai’ is today a widely recalled slogan. The other effort they have made is even more laudatory. They have built a strong push for SIP or Systematic Investment Plan. You invest the same amount of money every month, don’t worry about the ups and downs of the market. From what we heard Mr K V Kamath say, that seems to be finding favour. Money flow into mutual funds are not swinging with the ups and downs of the market. Right through 2022 when the market was moving sideways, from 1 Jan 2022 to 1 Jan 2023 the Nifty hardly recorded a gain, but mutual funds and especially SIPs continued to clock inflows.
So can AMFI declare victory. Not really.
RBI data about household financial savings paints a different picture. Indians invest in gold and real estate in big numbers but if we take those out and look at just the financial savings, the picture is not something to cheer about. The biggest chunk of savings go into what has been traditionally the big buckets: bank deposits [35%], life insurance [18%] and PF/PPF [22%]. These three together account for a whopping 75%. Mutual funds come in at a respectable 6% and small savings account for 7%. Pure equity investments are a paltry 1%.
CRISIL report says that over the last five years Mutual Funds have outgrown Life Insurance and may overtake Life Insurance premiums paid by the year 2027.
App based trading has opened up the flood gates and if you were to study the growth of demat accounts, we should see a big upward movement in pure equity investments and exchange traded funds.
Mutual Fund industry should be justifiably proud to have worked together, and with regulators, to bring about a slow change in public attitude towards mutual funds. The topic of mutual funds has become so popular that there is even a best seller ‘Let’s Talk Mutual Funds’ [by veteran financial journalist Monica Halan].
One caution remains. A big crash like what we saw in 2020 may see investors running back to gold and FDs. But for that black swan event we can hope to see Mr Kamath’s words ring true for the coming decade.
Appeared originally in Business Standard 16 Nov 2023