MondayFounder

In a thought-provoking revelation, the Securities and Exchange Board of India (Sebi), the regulatory authority for markets, has presented some astonishing figures. It has come to light that during the previous fiscal year, more than half of the mutual fund units in regular plans were either sold or redeemed within a mere twelve months.

Sebi, in its consultation paper on reviewing the total expense ratio (TER) charged by asset management companies (AMCs), stated, “In FY 2022-23, 73% of mutual fund units were redeemed within 2 years of investment. Only investments in 3% of the units continued for more than 5 years.”

Furthermore, within the financial year of 2022, approximately 71% of all mutual fund units were redeemed within a two-year investment period.

To address the issue of excessive trading, which may be a consequence of mis-selling by mutual fund distributors, Sebi has proposed a solution. In the case of a switch transaction, the distributor’s commission would be reduced, discouraging frequent switching.

Additionally, Sebi has recommended an increasing trend in the commissions paid to distributors, with the first year’s commission not exceeding 25% of the committed amount for the first three years.

Although many mutual fund investors express dissatisfaction with their returns, Sebi’s data sheds light on how investors’ tendency to churn their investments may be a contributing factor to subpar performance in certain cases.

In the fiscal year 2022, mutual fund investors collectively incurred expenses (TER) amounting to Rs 30,806 crore. If Sebi’s proposal to cap fees is implemented, the industry-wide expenses are expected to decrease by approximately 4.55%.

As per the proposed slabs, the maximum TER for equity schemes should not exceed 2.55%.

Why do mutual fund investors give up so easily?

Insiders within the industry attribute the allure of quick gains among retail investors as the primary reason for this wave of redemptions.

“Today, markets are easily accessible to investors through their smartphones, allowing them to compare returns of various mutual funds in real-time. The constant influx of short-term news and information plays on their emotions and biases, ultimately instilling a fear of losing money in the short run,” explains Gaurav Rastogi, the founder and CEO of Kuvera.in.

Rastogi finds Sebi’s data on churn in regular plan folios alarming, particularly with the significant number of new fund offerings (NFOs) introduced in the past two years. He highlights, “Around 27% of NFO AUM was switched from other regular plans of the same AMC, according to Sebi’s data.”

The current trends and statistics certainly raise questions about the longevity of long-term investing. Will investors continue to succumb to the allure of instant gratification, or will they recognize the potential benefits of a more patient and enduring investment strategy? Only time will tell.