Investors have been withdrawing money virtually every month for the past 13 months—whether we are in a bull market or a bear market. This gives the lie to the fund industry’s notion that investors are merely booking profits
After the ban on entry load that came into play from 1 August 2009, outflow of money from fund schemes accelerated since most financial advisors could not get incentive to sell and service funds. Yet, industry leaders have been defending the new system publicly by arguing that the system would adjust to paying commissions, sooner than later. Industry leaders have also been trying to explain away the continuous haemorrhage of funds as ‘profit-booking’.
However, the fact is that whether the market was down or up, investors have been selling. More importantly, investors actually put in a lot more money (on a gross basis) after the recent bull-run started in May 2009. Indeed, during the May–July 2009 period, gross inflows went up along with the upswing in the stock markets.
It’s only from August 2009 that lower fresh purchases and higher redemptions started happening. The reason for that, of course, is the ban on entry load by the Securities and Exchange Board of India (SEBI) in late July.
Mutual fund houses argue that redemptions are happening because people are exiting as they come to a break-even level on their earlier investments. People who invested in mutual funds prior to the dramatic collapse in the stock markets in 2008 could not get out without taking a huge hit on their portfolios. With the markets recovering, however, investors wasted no time exiting the funds to minimise their losses or book profits, if any.
But why is it in August 2009 mutual funds saw inflows of Rs580 crore while outflows touched a huge Rs1,100 crore? The coffers of fund houses started draining from this month onwards, when net flows registered a phenomenal drop from positive flows of Rs2,000 crore in July to an outflow of Rs520 crore.
According to data available to Moneylife from a leading registrar, redemptions have far outweighed inflows into mutual funds between March 2009 and January 2010. While the Sensex has soared 68% in this period, net flows continued to remain in negative territory, except in a couple of months when new fund offerings boosted inflows.
In July 2009 and January 2010, net flows amounted to nearly Rs2,000 crore and Rs175 crore respectively, aided by robust new fund offer (NFO) purchases. In all the other months, net flows have remained in negative territory—uncorrelated to the market direction.
The only month which saw exceptional inflows was July 2009, post the announcement of the budget, when around Rs3,000 crore was pumped into mutual funds from NFOs and existing schemes.
January 2010 also witnessed record jump in both inflows and outflows. While fresh purchases amounted to nearly Rs750 crore, redemptions were in excess of Rs2,100 crore. These were the highest inflows and outflows during the period between March 2009 and January 2010. This probably indicates that while existing investors are going out, new investors are coming in, possibly through a different set of distributors such as banks.
This once again proves that fund outflows cannot be explained away by simplistic arguments such as profit-booking.