Equity mutual fund schemes reported steady inflows over the past 20 months. But suddenly, in December 2015, net inflows dipped to its lowest since May 2014. In December 2015, equity schemes reported a net inflow of Rs3,464 crore. While sales remained steady compared to the past months at around Rs13,409 crore, redemptions peaked to Rs9,945 crore in December 2015. This was the highest redemption reported since September 2010, when as much as Rs13,250 crore flowed out of equity schemes. Of course, figures of equity assets under management have increased a lot and so on a percentage basis, the impact would be less. The outflows in September 2010 were about 6% of the total equity assets, while in December 2015, the outflows were about 2% of the total equity assets. With the S&P Sensex and CNX Nifty 50 trending downward in 2015, are retail investors redeeming in panic? 

Mutual fund investors usually buy high and sell low. The 2015 data would reconfirm this. As seen in the past, investors usually come in when the market has staged a strong rally and is beginning to get overvalued. As can be seen in the chart below, the highest net inflows came in the months when the CNX Nifty 50 index was quoting a price-to-earnings (P/E) of over 22 times, indicating high overvaluation. The long term average Nifty P/E is around 18 times.

Investors choose what is hot. They get in at a chosen time, thinking that the market will go up. Or they exit, thinking that the market will go down. Often, they do this market-timing and fund selection based on what they hear from the media, their wealth managers or other sources. What is the net result of this buying and selling? A huge loss of returns from the notional market returns.

We had warned here that ‘retail investors have turned bullish looking at the trend in the market; unfortunately, most of them are moving in when the market is highly overvalued’. Fund houses too capitalise on this behavioural-bias of investors. In 2015, as many as 63 equity schemes were launched.

This trend was prominent in the 2007-08 period when as much as Rs47,000 crore flowed in to equity mutual funds. Then too, it was a time when the markets were commanding an extremely high valuation. However, when the market crashed subsequently, equity mutual fund schemes suffered massive outflows in the months that followed.