MFs lose 4% retail folios in H2FY14: Apathy to mkt intact?

Despite the Indian equity market soaring to new highs, retail investors and high net worth individuals (HNI) continue to exit equity mutual funds.

According to the data released by the Association of Mutual Funds in India (AMFI), mutual funds lost 16 lakh retail folios over the past six months ended March 2014.

Overall, at the end of the second half of the financial year 2014, the industry had 3.95 crore folios including institutional and HNI's folios. Sandesh Kirkire, CEO, Kotak Mutual Fund believes that the key challenge facing the mutual fund industry is the lack of financial literacy among investors and the fact that retail investors fail understand that they need to stay in equity mutual funds for much longer time (3-5 years) to fetch handsome returns.

"Our fund managers would believe that they have done a fantastic job because they have produced an alpha on the underlying benchmark that they are managing. The investor is not willing to accept that. You have to look at it over at least three-five year horizon. This is perhaps a malaise of the entire capital market," he adds.

On the other hand, AMFI data points out that debt funds have seen a rise in number of retail folios.

Also Read: Mutual funds' average assets cross Rs 9 trillion mark

Below is the verbatim transcript of Sandesh Kirkire's interview with CNBC-TV18's Menaka Doshi and Anuj Singhal.

Menaka: Would you be seriously concerned by this lack of participation?

A: Our biggest challenge is on basics of financial literacy. The investors really don't appreciate the fact, this whole thing started right when indices crossed 21,000. There was redemption, investors were feeling 21,000 has come and we saw this level sometime in 2008, so it is a great time to book without realizing that its valuation which is key.

At the industry level, we have been making all kinds of initiatives to make people understand that look this market level to level is perhaps 40 percent cheaper than what it was last. From a folio perspective, the industry has lost, but perhaps similar numbers one might see actually even in the demat accounts. The closure of demat accounts, just removing non-zero balance account; one will see the same fall there.

At the industry level, the period that the investor has stayed with us at the industry level in the equity schemes is somewhere between 1,300-1,400 days. To my mind this number was perhaps 600 days five-six years back. Since then the market did not give any returns to the investors, so the average period of holding kept on going up. Now, perhaps some investors having seen their returns are looking at exiting without realizing that markets give lumpy return and one has to stay for long here.

Menaka: You are saying one of the reasons for this is financial literacy or like you said lack of education or lack of information but even HNIs have exited. We have seen a decline from equity oriented schemes but infact we have seen an increase in debt oriented schemes. So, either retail investors are just tired or fatigued by these equity markets or they have no faith left in your fund managers because they are just preferring to put money in debt?

A: Our fund managers would believe that they have done a fantastic job because they have produced an alpha on the underlying benchmark that they are managing. The investor is not willing to accept that. You look at any period, on AMFI website if you go there is a detailed analysis of how the industry has performed and what kind of alpha the industry has generated but you have to look at it over at least three-five year horizon. This is perhaps a malaise of the entire capital market.

Menaka: HNI folios in equity oriented schemes have declined 7 percent in the second half of FY14 whereas they have gone up by 2 percent in debt funds?

A: The fact is when you are looking at debt funds there is a large FMP market which was giving 9 percent plus kind of return. Lot of money moved in there that is the reason perhaps one may see a marginal rise there. But this is malice not only for MF industry but broad capital market. We are talking about less than 1 percent of Indians actually investing in the Indian capital market. We have got more investors in the equity market through mutual funds, which have been existing for the last 20 years.

Menaka: The big picture is evident to us that we have not been able to boost capital market participation on the retail front. They are exiting. Is this likely to continue or are you anecdotally seeing some interest come back given where we are in the markets right now?

A: At the moment smart money is certainly coming into the market and MFs. But those redemptions are higher that is the reason in FY14 the total net sales for the industry was negative at upwards of Rs 11,000 crore. Towards the end of the financial year, there were positive flows coming in, but overall the industry has lost which is true for whether it is equity folios with the MFs or even demant accounts. We don't have investors in the equity markets to the extent what they should be.