This post initially appeared in Moneycontrol.com
The mutual fund (MF) industry has never had it better. Inflows into equity funds are increasing. Equity and balanced funds received combined net inflows of Rs 4,300 crore in July 2016.
In July 2017, these inflows ballooned to Rs 19,901 crore. As a result, the average SIP ticket size too increased from Rs 2,500 in 2016 to Rs 3,250 in 2017, shows data from Association of Mutual Funds in India (AMFI).
The rally in markets coupled with the industry’s effort of educating investors to stay invested during volatile times by avoiding noise has worked its wonders. This is evident by the sticky retail assets.
According to AMFI data, of the Rs 3.48 lakh crore retail mutual fund equity assets as on June 2017, 51 percent or Rs 1.76 lakh crore assets remained invested for more than two years.
Let us examine why inaction can be better for your clients’ portfolios. With 24X7 news coverage, we are bombarded with updates on events which may not hold any significant impact on our portfolios, except for the short term.
Not all information is good information. The author of the bestselling book ‘The Art of Thinking Clearly’ suggests that we should avoid the news.
To put it in Rolf Dobelli’s own words, here is an extract from his book which was reproduced in Guardian, “Out of the approximately 10,000 news stories you have read in the last 12 months, name one that – because you consumed it – allowed you to make a better decision about a serious matter affecting your life, your career or your business.
The point is: the consumption of news is irrelevant to you. But, people find it very difficult to recognize what's relevant. It's much easier to recognize what's new. The relevant versus the new is the fundamental battle of the current age.
Media organizations want you to believe that news offers you some sort of a competitive advantage. Many fall for that. We get anxious when we're cut off from the flow of news. In reality, news consumption is a competitive disadvantage. The less news you consume, the bigger the advantage you have.”
Thus, by avoiding short term noise, retail investors are able to invest systematically by not monitoring their portfolios at regular intervals which eventually helps them get the power of compounding.
Rightly so, analyzing each event, its implications on your portfolio and trying to time the market can be a mindless task, unless you are a high-frequency trader.
The longer investment horizon of retail investors is partly owing to their method of investing in mutual funds and a shift in mindset.
Many retail investors invest through SIPs. And, financial advisers have been educating investors to link their investments with goals which can be short term or long term. The farther the goal (retirement), the stickier the assets.
Thanks to the industry’s and advisers’ effort in popularizing SIPs, we have today reached a milestone of 1.52 crore SIP accounts. AMFI data shows that the MF industry has added about 8.23 lakh SIP accounts each month on an average during the FY 2017-18.
Fueling this trend is technology which has made it easier (for KYC compliant investors) to open an MF account in seconds and start a SIP.
Investments of up to Rs 50,000 per AMC per year can be done by doing an Aadhar based e-KYC within seconds. This facility is only available for investors who are non-KYC compliant though.
While technology provides ease of investing it also comes with its disadvantages. Investors having access to portfolios 24x7 online may panic looking at their portfolios and hit the exit button during volatile times.
Similarly, technology can help investors invest during market corrections without having to rush to distributors office to get the same day NAV.
Thus, investors would do well to consult their financial advisers even when they are executing transactions online so that fear or greed does not get the better of them.
Fortunately, we are already seeing a shift in investor mind set. They are not falling prey to biases by reading news. For instance, when the Brexit news shocked world markets in June 2016, balanced funds category saw net inflows of Rs 2402 crore.
Today, monthly average inflows in balanced funds this financial year stand at Rs 7,500 crore. To reiterate, sticking to goals would help your clients reach their goals rather than react to market noise.
