Indian investors, even higher income ones, have turned away from equity. This is not good for their long-term financial health.
Once upon a time, India was a fixed-income country. All financial investments were made into deposits of one kind or another. This was true at least the mid-nineties. The only time the investor dabbled into equities was when he filled out his application form for an initial public offering (IPO), or just “issue”, as it was then called. Then, from about the mid-nineties onwards, there arose a small but distinct equity culture where individuals started investing in equity mutual funds in reasonable numbers.
This equity culture is now in full retreat. In the last few years, the number of investors in equity funds as well as the inflows into such funds has been in full retreat. Last year’s (2012-13) data from industry body Association of Mutual Funds in India shows that even among richer investors (HNIs, in the jargon), fixed-income is the preferred asset class.
Between March 2012 and March 2013, the number of HNI-owned mutual fund accounts as well as the assets in these accounts went up by more than a third. For equity, the numbers show a 5% decline in the number of accounts and a 10% decline in the money held in these accounts.
On the face of it, there is justification for these numbers. Equity returns have been below expectations for a long time. Three year returns of the average large-cap equity fund stands at 5.4% while five year returns are also about the same. Meanwhile fixed-income funds yield in the region of 8 to 10%, depending on the type and the time horizon. However, this is a short-sighted view which inevitably leads to the returns-chasing behaviour. When equity will start going up sharply, then investors will rush in.
Meanwhile, a regular SIP in the median equity fund over the last five years would have generated returns of 10% — and these are through bad times. By chasing short-term debt returns because short-term equity returns is a poor strategy — investors are not even beating inflation.