It’s official: greed and fear shows up in data
Experts always said that markets move on fear and greed of investors, and the figures just proved this.business Updated: Nov 03, 2009 21:54 IST
Experts always said that markets move on fear and greed of investors, and the figures just proved this.
A comparison of bank deposits and equity mutual fund assets shows that the number of bank deposits climbed during ‘period of fear’, while greed pushed up equity mutual fund assets under management (AUMs), reflecting the level of risk appetite in investor community when the going is good.
In January 2007, bank deposits were around Rs 24.85 lakh crore — 20 times over the equity MF AUMs of Rs 1.21 lakh crore. In the bull market, the percentage of investment in equity MFs went up to 6.7 per cent of entire bank deposits, at Rs 1.92 lakh crore. Bank deposits were Rs 3.04 lakh crore.
When the bear phase set in, and the market touched the bottom in February 2009, that proportion fell to 2.34 per cent, with bank deposits growing 42 times of equity MF investments. “While bank deposits were around Rs 38.48 lakh crore, the AUMs were mere Rs 0.89 lakh crore, indicating excess fear in the system,” said Jagannadham Thunuguntla, Equity Head of SMC Capitals Limited.
“Though this has always been the case, it should be the opposite,” said Siddharth Bhamre, Head – Investment Advisory and Derivatives, Angel Trading, about the sentiment-driven herd mentality. When markets fall 30-40 per cent, fund flow should be into equity because it helps get in at lower levels.
However, a retail investor who sees 10-15 per cent of his portfolio get destroyed, would not stick on unless he has invested according to his risk appetite and time horizon. “Such situations often force investors to liquidate their portfolio and park the fund in safer area such as bank deposits,” said Bhamre.
From September 2008, fear pulled investment in equity down till markets started to recover around March, with the ratio of AUMs touching 4.12 per cent of bank deposits.
Going forward, experts are confident that the 10 per cent correction seen in last few days would usher in higher liquidity.
“FIIs and HNIs have not participated heavily in the rally yet. This correction would bring in higher liquidity,” said Bhamre.