Why Are Equity Mutual Fund Investors Exiting?

Investors have begun to redeem their equity mutual fund schemes as markets recovered substantially in the month of October.

Equity mutual fund schemes continued to see outflow for the fourth straight month in October as redemption pressure continued. According to data from the Association of Mutual Funds in India, net outflow from equity mutual fund schemes was at Rs 3991.01 crore in October. This compares to an outflow of Rs 1,009.01 crore and Rs 4,028.83 crore in previous two months.

According to Aashish Somaiyaa, Chief Executive Officer - White Oak Capital, the sharp fall in markets in March 2020 would have certainly scared equity investors.

"Usually even as they may be worried, investors prefer not to withdraw when markets are down but it is quite unfortunate that now when values are being restored we are seeing large number of investors bolt for the door. Committing to investments on the way up and giving up on investments after a fall is not the way to create wealth.

Also this is not the time to withdraw money from equities because macro conditions portend a new economic cycle, it is for the first time in many years we have seen a quarter where earnings are way ahead of consensus estimates and corporate performance has surprised on the upside. Exactly at the time when there is potential to generate returns better than the last 5 years, we are seeing investors exiting the markets. It's like watching a movie and exiting the cinema hall just when the story is set to get better and an expected climax is set to play out," he stated.

Interestingly, as we write the Sensex and the Nifty have hit record highs and are up substantially on the back of a Biden win and a vaccine for Covid-19. It's likely that investors will book profits on their equity investments and there is a compelling reason to sell.

Many are comparing equity investments returns to returns from gold over the last 2-3 years and feel that they were better placed in gold. For investors it is not a matter of sentimental attachment, but of returns. If they feel that a particular asset class can give substantial returns, they are likely to chase the same. Gold has gained a whopping 30 per cent in the last 1 year or so and many investors believe that they lost an opportunity there, while equity investments have not given extra ordinary returns.

Going forward it will be interesting to see how both the asset classes play out.