NEW DELHI: World's richest investor Warren Buffett's favourite holding period is forever, but for India's mutual fund investors it all boils down to a few months.
A recent report by markets regulator Securities and Exchange Board of India (Sebi) has revealed some startling facts. In the last financial year, over 50% of mutual fund units of regular plans were sold or redeemed in just one year.
"During FY 2022-23, 73% of mutual fund units were redeemed within 2 years of investment. Only investments in 3% of the units continued for more than 5 years," Sebi said in a consultation paper on review of total expense ratio (TER) charged by asset management companies (AMCs).
In FY22, around 71% of the total mutual fund units were redeemed within two years of investment.
To discourage churning which may be due mis-selling by MF distributors, Sebi has proposed that in the case of a switch transaction, the distributor shall be entitled to lower the commissions offered under the two schemes of any switch transaction.
The regulator has also suggested that the commission paid to distributors should be in increasing trend with the first year’s commission not being more than 25% committed to the distributor for the first three years.
While many mutual fund investors complain about not getting enough returns, Sebi data shows how the churning by investors might be one of the factors behind sub-standard returns in some cases.
In FY2022, mutual fund investors paid Rs 30,806 crore as expenses (TER). If Sebi's new proposal capping fees is implemented, it will go down by around 4.55% at the industry level.
According to the proposed slabs, the maximum TER for equity schemes shall not be above 2.55%.
Why do MF investors give up so early?
Industry insiders blame the lure of quick money among retail investors as the top reason behind the redemption pressure.
“Markets are now in the palm of an investor’s hands which enables them to make easy comparisons of returns between different mutual funds every minute of the day. And this short-term news and information plays on their minds which in the end adds to biases and makes them fearful of losing money in the short term,” Paras Matalia, Fund Manager, SAMCO Mutual Fund, told ETMarkets.
Gaurav Rastogi, founder & CEO, Kuvera.in, finds the Sebi data on churn in regular plan folios quite concerning. “The last two years have seen a huge number of NFOs come in and SEBI data shows that ~27% of NFO AUM was switched in from other regular plans of the same AMC,” he pointed out.
Further since the crash of March 2020, a lot of distributors are promoting investing in a debt fund and then STP into equity which also gets captured as short term churn as STPs are usually for 6 months to 1 year, Rastogi said.
And then there is also a cultural issue as India has traditionally been a fixed-income country and it is only in the last few years that investors have started warming up to the idea of investing in market-linked products like mutual funds. “So, what appears as an early drop out, in my opinion, is nothing but part of the learning curve. As investors realise that both short-term gains and losses shouldn’t be the reason for quitting and that it’s long-term investing which creates the real magic, they will start to act more responsibly,” Santosh Navlani, COO, ET Money, said.
In the last nine years, MF industry’s AUM has grown over fourfold, from about Rs 10 lakh crore in May 2014 to about Rs 41.5 lakh crore in April 2023.
Typically, the ideal holding period for an equity mutual fund is considered anywhere between a minimum of 3-5 years. But data shows that only investments in 3% of the units continued for more than 5 years.
“The rule of thumb is five years. If it’s a riskier type of fund, such as a small-cap one, then I would say, seven years. But a better approach would be to link your equity fund to a long-term goal, such as your retirement and children’s higher education. That way, you would naturally be motivated to invest for the long term, without worrying about how many years you should stay invested for,” Navlani said.
Studies done by ET Money shows that since June 1999, if you had invested in Nifty50 for any seven-year period, your chances of getting a negative return were zero. On 82% of the occasions, you would have made returns of over 10% per annum. And if you stayed invested for 20 years, there was almost a 100% chance of getting a more than 10% return per annum.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of Economic Times)
