Mutual fund outflows defy market trends

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.

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    1 decade ago

    This is the true real fact that banning of entry load has played the most vital part in reducing AUM of MF industry-most people dont want to accept this fact because they dont have courage to admit mistakes done by them-bcos we r not in Gandhian era-when admitting mistake was considered a proud part-but the truth cannot be buried for long-it comes out with double volcanic force-whatever AMC or SEBI people might say-the fact is that no IFA is going for small ticket SIP or 5000 Rs single purchase-who will be fool to collect Rs 10 or 20 as commission to collect directly from client?may be it is viable for MR BHAVE to go and collect from client everymonth-but for poor IFA-it is never workable-the real truth behind some selling of MF is not bcos clients are willingly paying to IFA but the truth is that some part of upfront is paid by AMC's-thats the real reason for new purchases-that too inselected schemes which offer more upfront then others-this is same story of upfront paid by AMC's earlier-nothing has changed-but i am sure-people wont accept this real fact-bcos they r in 21st century-where bluff looks more polished then truth-they wud fnd many good answers to push truth behind everything-but these people forget that truth is only ever lasting and bogus has to wear new dressess every day- so lets hope someday truth will bounce back-the truth that for every person earning livelihood is first moto-if there is no attraction-no one will work-

    R Balakrishnan

    1 decade ago

    When distributors pockets are empty, they turn to insurance. In fact in many cases, the distributors are telling clients to switch from mf to insurance ULIP.s If you tabulate the sales of ULIP policies, it would probably more than compensate for the mf industry loss. Anything bad for the investor always sells more.

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