- Sandeep Singh
Over the last five years, equity culture has rapidly spread across small-town India - both in the number of first-time mutual fund subscribers, as well as in the amount invested. The coronavirus pandemic is these small investors' first introduction to "severe market risk" and, experts hope, to opportunity as well. Top mutual fund managers say that despite the crash, a 28 per cent fall from a high of 41,952 on January 14 to just under 30,000 last Friday, they haven't seen a pressure to redeem. Take the case of Nitin Singh, a Gorakhpur dentist. In August 2014, he started an SIP (Systematic Investment Plan) in Reliance Small Cap Fund (now Nippon India Small Cap Fund) with a modest investment of Rs 2,000 per month. On January 20 this year, the value of his cumulative investment of Rs 1.28 lakh had jumped 35 per cent to Rs 1,72,604.
Small investors are hit hard but corona deeper worry than crash could have sold, but he continued with his SIP - and on Friday, his investment of Rs 1.32 lakh had eroded to Rs 1,12,680. "It is a huge loss but my family's health is important right now, and I know that the markets will recover," Singh said. "We don't know when, but we know they will."
Singh is not an exception. Like him, if someone had invested Rs 5,000 on the first of every month beginning January 2014 in a mutual fund tracking the Sensex, the value of her cumulative investment of Rs 3.65 lakh on January 20, 2020 (when the stock markets peaked) would have been Rs 5,09,995. But the sharp fall in the subsequent weeks has seen her investment of Rs 3.75 lakh (adding Rs 10,000 for February and March) drop to Rs 3,54,503 on March 19, actually eroding the principal investment itself.
The sudden fall is a throwback to the 2008 global financial crisis when the Sensex lost 36 per cent in just four weeks ending October 24, 2008. But this time, the circumstances are different. Over the last six years, the number of equity mutual fund accounts more than doubled to over 6.25 crore. And the equity assets under management grew five-fold to Rs 7.9 lakh crore, with money flowing at an increasing pace from smaller towns through mutual funds.
Data sourced from the Association of Mutual Funds in India (AMFI) reveal that assets under management (AUM) of retail investors from small towns beyond the top 110 cities increased 18-fold from Rs 17,330 crore in March 2014 to Rs 312,664 crore in December 2019. For the bulk of these investors who entered the stock markets through the mutual fund route over the last six years, the sharp fall would be unnerving.
Market veterans, however, point out that the market crash isn't top of the mind right now. "Investments have become a secondary concern. All the talk is about COVID-19 and how to stay safe," said C J George, Managing Director, Geojit Securities, one of the largest MF distribution firms.
This probably explains why investors are not exiting. Prashant Jain, Chief Investment Officer, HDFC Mutual Fund, said he was surprised there was no redemption pressure. "The investors have matured and are much more aware. They should also look at the fall in markets as an opportunity. While the impact of the coronavirus outbreak on the GDP could be 1-2 per cent, the markets are down by 30 per cent," he said.
George too said investors must not sell now. "MFs are generally sold as a long-term investment product and investors should stick with their investments. The other part to it is that since the entire concern is around coronavirus, the moment some kind of success is achieved in controlling it, we may see a V-shaped recovery," he said.
In the last six years, mutual funds and distributors have penetrated smaller towns and cities. The top 15 cities which accounted for almost 86 per cent of the industry AUM in March 2014, now account for just 74 per cent. In fact, the AUM from cities beyond the top 15 have increased over five-fold to Rs 7.06 lakh crore in December 2019 compared with Rs 1.13 lakh crore in April 2014. AMFI data show that cities and towns other than the top 110 cities (in terms of AUM contribution) also increased their share in industry AUM from 2.6 per cent to 11.5 per cent during the period.
Market players attribute the rational behaviour of investors to the change in demography and long-term investment philosophy through mutual funds. "The majority of new investors entered the markets through mutual funds and many do not track NAVs (net asset values) of their funds on a daily basis. To that extent, there is less nervousness this time around," said the CEO of a mutual fund, who did not wish to be named.
Experts analyzing the capital markets also point to the strong counter-balance that retail investors have provided through domestic institutional investors such as MFs. While foreign portfolio investors pumped in Rs 1.99 lakh crore into Indian equities between April 2014 and March 2020, equity mutual funds saw net inflows of Rs 5.22 lakh crore (till Feb 2020), more than two-and-a-half times the FPI inflows.
This compares starkly with the previous six-year period. Between April 2008 and March 2014, while FPIs invested a net of Rs 4.36 lakh crore, mutual funds witnessed net outflow of Rs 27,929 crore from equity schemes. Of course, inflows into equities through MFs have seen a massive rise since May 2014 - from an AUM of Rs 152,206 crore in January 2014, it increased more than five times to Rs 789,637 crore at the end of January 2020.