Retail investors stick to mutual funds but also value direct investments

Nearly 55% of retail equity MF holdings remained in the market for more than two years as of September 2021, shows the latest available data from the Association of Mutual Funds in India. This is a considerable improvement from the 46.7% share in September 2019. The share of high-net-worth individuals has also risen sharply from 32% in September 2019. Even after the late arrival, it was 43% in September 2021.

Sahil Kapoor, Head of Products and Market Strategist at DSP Mutual Fund attributed this to several factors. “One, with the rise in the market, the assets under management (AUM) would have increased in themselves without even more participation,” he said. “The other is the lack of attractiveness of alternative assets.”

This discipline has helped it deliver excellent returns to investors amidst rising markets since 2020. All equity scheme categories have given double digit returns in the last two to three years, with some giving annual returns of up to 40%. “Investors need to accept that equity investing is a long-term outlook, it will have periods of excellent returns, which may be followed by periods of flat or volatile markets,” said Kavita Krishnan, Senior Research Analyst, Morningstar India.

small is powerful

With more retail participation, Systematic Investment Plans (SIPs) have grown in popularity. Their share in the AUM of the industry has increased from 12.6% to 14.6% over the previous year. Reaching new heights with record contribution of Monthly SIP Book 11,005 crore in November.

An average of 2 million new SIP accounts were created per month in 2021 as against 0.9 million in 2018-2020. Sumit Agarwal, Vice President (Equities), IDFC AMC said, “The expanded reach, proactive efforts of AMCs (Asset Management Companies) as well as distributors and the facilitation offered by new age fintech companies are going to take this further.”

However, the average SIP ticket size, which used to be approx. 2,900 before the pandemic, has shrunk 2,300 in the last few months. Analysts expect some near-term volatility before ticket size increases meaningfully.

strong current

Healthy SIP contribution by individual investors is reflected in other metrics as well. The closure ratio, measured as SIPs closed as part of fresh SIPs registered, has fallen to almost half the peak in May 2020. Steady contribution has ensured strong net inflows into equity schemes for the last nine months. Despite an intermittent correction in the markets, net inflows remained positive in November, climbing to a four-month high, supported by lower redemptions.

However, the recent phase of consolidation, triggered by frequent selling by fast-moving central banks and foreign portfolio investors, could increase volatility in 2022, and this could affect investor sentiment.

“Given the inflation risk ahead, we cannot be sure of the timing, but the direction of rate decisions is mostly clear, whether at the Fed or domestic level,” Agarwal said.

immortal frenzy

Nevertheless, strong capital market gains in the past one year have also prompted investors to invest more in direct stocks. The retail stake in BSE 500 stocks increased from 6.4% in September 2020 to 7.4% in September 2021. SEBI data shows that the number of demat accounts increased by a record 18.7 million in the first seven months of this financial year.

Krishnan attributed the recent traction in the markets to higher household savings due to lower spending during the lockdown. “As consumption picks up, people are looking for ways to invest their savings in a number of ways, the stock market being one of them,” he said.

Though investors have invested and increased their stake, experts believe that there is still room for improvement. Despite strong growth, mutual fund penetration in India remains low. While it is progressing well on cost and transparency, Kapoor said the industry needed to reach addressable markets while ensuring financial education was increased access.