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3 Data-Driven Inferences About Mutual Fund Investor Behavior

Mutual Fund investors that are very much prevalent today, despite some solid and persistent efforts from the regulator and the apex body at educating investors

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A picture may be worth a thousand words, but when it comes to helping us draw inferences about investor behaviour, there's nothing quite as good as data. And ICRA's recently released "Monthly Update on Mutual Funds" provides three interesting insights on the behavioural pitfalls of Indian Mutual Fund investors that are very much prevalent today, despite some solid and persistent efforts from the regulator and the apex body at educating investors.

Inference No 1: Equity Investors are still mercurial
In April 2018, Equity funds (including ELSS and Arbitrage Funds) witnessed monthly net inflows of Rs. 12,409 crores, up 86.4% from Rs. 6,657 crores in March 2018. Take away the AUM that flowed into equity funds via auto-mode in March through SIP's, and the net inflow number will seem even less impressive. Here's an interesting fact though - March '18 was a bearish month, with the index dipping from 10,400 levels to sub 10,000 levels in the first three trading weeks. April was a much stronger month, with the NIFTY rising close to 500 points. What this goes on to really show is that most equity investors still react poorly to even slight corrections in markets. If a 5% market swing can make a 2X difference in the quantum of inflows, this surely underscores the fact that Indian equity Mutual

Fund investors are still, by and large, mercurial "return chasers".

Inference No 2: Debt Fund investors lack awareness of fixed income concepts

After registering an outflow of Rs. 13,719 crores in March 2018, the "income funds" category witnessed net inflow of Rs. 5,220 crores in April 2018. Why investors would collectively lose interest in income funds in March - and subsequently gain it back in April - is unfathomable; given that no fixed income market dynamics really changed materially between the two months. It's quite clear that most investors (and many advisors) are relatively clueless about what factors influence debt funds returns and how - and with the recent poor show by most fixed-income funds, a lot of investors are wildly flailing their arms without a clear, well thought out investment strategy for the future. In fact, if anecdotal evidence is to be believed, a surprising number of Mutual Fund investors actually believe that "income funds" are named thus because they are engineered to provide regular incomes to clients!

Inference No 3: Balanced Funds are a misunderstood product

The ICRA report noted that "Inflows in Balanced category came in at Rs 3,500 crore, down 48.2% MoM following levy of a 10% dividend distribution tax from April 2018". What this tells us is that Balanced Funds are a poorly understood product - and make no mistake - they are a poorly sold product too. Investing into the dividend option of Balanced Funds with the intent of generating a consistent income stream is an endeavour that is bound to cause heartache for investors, as both the periodicity and the quantum of these dividends will fluctuate wildly! And yet, it seems that a large number of investors do exactly that. The tax efficiency of dividends - or its relative lack - should actually be the last thing that should influence an investor's decision to invest in balanced funds or not. Rather, this decision should be driven primarily by the investor's appetite for risk; Balanced Funds can by no means be classified as low-risk investments.


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