Retail investors are blamed for following the market momentum, ignoring fundamentals and falling in traps set for them by ‘so called’ expert investment advisors and portfolio managers. For all these reasons, they end up investing when it’s time for Foreign Institutional Investors (FIIs) to exit. Also, retail investors exit when FIIs make investments in India based on some prognosis about prospects of India’s economy. This phenomenon has been observed many times in the past.

Nevertheless, going by current numbers, one may feel that retail investors are showing some respect to market valuations. Although, inflows in mid and small cap oriented funds still remain strong; it has been experienced that, redemptions in equity oriented funds are rising steadily for last 3-4 months.
 

Are retail investors showing maturity?

(Data as on August 11, 2015)
Source AMFI, PersonalFN research

However, PersonalFN is of the view that, before you read too much into growing redemptions, you must look at net investments of retail investors in mutual funds. Investors have pumped in more than Rs 53,300 crore in equity oriented funds over last 6 months. Moreover, it has also been seen that, inflows and outflows are more sentiment driven than valuations driven. For example, when there were uncertainties about how the Budget 2015-16 will be, redemptions exceeded net investments. There was a possibility that, disappointment in budget could lead to a market fall.

Similarly in July, when major global developments affected the market sentiment, quantum of redemptions exceeded the net investments. On the other, hand, despite of weak corporate results in Q4 of Financial Year (FY) 2014-15 and Q1 of FY 2015-16; net inflows of equity oriented funds exceeded the redemptions in April, May and June this year. What you need to notice is, net inflows are still in green and have been robust.

Does that mean investors haven’t learned anything from the past?
They may have not. Recently Franklin Templeton Mutual Fund told media that, the fund house has been witnessing huge inflows in its midcap oriented funds, the space where, high valuation is the biggest concern. Seeing the response that recently launched New Fund Offers (NFOs) have got, it seems there is still huge appetite for equity investments among retail investors.

PersonalFN is of the view that, retail investors are unlikely to be deterred by high valuations as long as markets are holding up strong. Investors have a tendency to take investment decisions based on returns an asset class has generated in the recent past. For example, when gold was rallying between 2009 and 2012; investors rushed to buy gold. When equities were looking cheap on valuations around mid-2013; Indian investors preferred to stay away from equities and equity oriented mutual funds.

What approach investors should follow?

There is a need to create awareness among investors. Today, they are largely driven by returns; they should be made aware of risks involved in equity investing. It is unfortunate that, majority of investment consultants don’t talk about concepts such as margin of safety and asset allocation; they just talk about how a particular asset class has a chance of generating superior returns. Unrealistic expectations, mismatch between time horizon of the investor and that required for the investment to generate returns and conflict between the risk profile of the investor and that of the asset class, often results in disappointment of investors.

PersonalFN has worked incessantly to educate investors on various platforms. PersonalFN believes, while there is nothing wrong in investing in midcap oriented funds even when valuations are high; you need be ultra-careful.

PersonalFN believes if you decide to invest in midcap oriented funds at this juncture, you should invest in funds that not only have a consistent record of performance but are cautious to market valuations and follow bottom up approach of investing. Opting for Systematic Investment Plans (SIPs) may be helpful at this juncture. In case, you are unclear about which funds to invest in; you may take advantage of unbiased mutual fund research services provided by PersonalFN.

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