How Investors Can Make The Most Of Market Volatility

Equity markets have been on a roller-coaster ride this week. After posting one of the largest single day falls (roughly 6%) on Monday, today markets staged a minor recovery of sorts. Not surprisingly, business channels and newspapers are dissecting every market development in great detail. Experts are busy predicting where markets are headed next. On their part, investors are tuned in with rapt attention.

While investors’ engagement with the external environment is understandable, this is indeed the right time to do some soul searching. The latter can prove to be the proverbial silver lining in this phase of market volatility. Surprised? Read on.

Equity investing is not without risk given the uncertainties involved; over shorter time frames, the risk is further accentuated given that even extraneous factors can significantly impact stock prices. As a result, while investing in equities/equity-linked products, one needs to be able to take on a certain degree of risk. This in turn necessitates an accurate assessment of one’s risk appetite. Sadly, that is easier said than done. When markets are rising, investors can erroneously start believing that it is easy to make money in the markets. This can lead to an inflated notion of one’s risk-taking ability. 

Harsh as it sounds, a volatile phase like the present one can provide a much-needed reality check. Now is the time to revisit your assessment of the risk you can take on. Ask yourself if you are yet as comfortable with equity investing as you were when markets scaled record highs earlier in the year. While an investment advisor can help with this exercise, you will have to play the most important part. If an honest introspection reveals that you have jumped the gun, don’t worry. All you need to do is rejig the portfolio so that it aptly reflects your risk appetite.

This is also a good time to evaluate if you’ve fallen prey to the ‘Keeping up with the Joneses’ blunder. At times, because a friend, relative or colleague claims to have done well with his equity investments, investors feel the urge to emulate his investments. The trouble with this approach is that it violates a basic tenet of investing. At its core, investing is a personalised activity. Investments have to be right for the investor in question. Hence, adopting the ‘one-size-fits-all’ approach can lead to unpleasant results. 

For instance, the friend (whose investments you have copied) may have a portfolio dominated by equities, since he has an investment horizon of a decade; conversely, you may have an investment horizon of just three years. In such a scenario, replicating his investment pattern wouldn’t be the best option. Yet again, it takes a bout of volatility to expose this inherently flawed investment practice.

Admittedly, market volatility can be a bitter pill to swallow. But the fact remains that while investing in equities, it comes with the territory. Rather than fretting over it, investors would do well to embrace volatility, and use it to their advantage by sharpening their investments.

Why Mutual Funds Must Stop Peddling Surrogate Advertisements Under The Guise Of Investor Education

This week, the front page of a business daily carried an advertisement from a fund house. The full-page advertisement had been issued to ‘educate’ investors about the benefits of SIP investing. On the next page, appeared another mutual fund advertisement; ‘issued in public interest’, this one spoke about investing in equity and debt schemes to balance the portfolio.

Both advertisements had apparently been issued to educate interests. But it was evident that they had little to do with investors’ education or interests. Rather, they were surrogate advertisements for promoting fund houses, with names, logos, websites and toll-free numbers being prominently displayed. Sadly, this practice has become the norm in the Indian mutual fund industry. When market regulator SEBI mandated that mutual funds spend monies on investor education, this is not what it intended.

The SEBI circular

In September 2012, SEBI issued a circular wherein it was stated that “Mutual Funds/AMCs shall annually set apart at least 2 basis points on daily net assets within the maximum limit of TER as per regulation 52 of the Regulations for investor education and awareness initiatives”. 

Ever since, fund houses have been at their creative best using various media to promote themselves under the guise of investor education. The pattern is predictable—throw in a line or two about investing such as “ELSS can help you save taxes” or “Debt funds can help you achieve your goals”—followed by a prominent display of the fund house’s name, logo, website et al. A classic case of killing two birds with one stone: fulfil a statutory requirement and yet indulge in self-promotion. 

As per media reports, at a recent seminar, SEBI chief Mr. U. K. Sinha was quoted as saying that only 18% of the investor education programmes conducted by fund houses had genuine investors. 

It will be interesting to find out what portion of the monies earmarked for investor education, has been spent by fund houses on surrogate advertisements aimed at self-promotion.

Fund houses’ perspective

It’s quite likely that some fund houses believe that they have been given a raw deal by being asked to spend on investor education. A fund house is a commercial enterprise whose primary activity is to manage investors' monies for a fee. Hence the thinking that they should try to get maximum bang for the buck by promoting themselves while spending for investor education. The trouble with this approach is that it displays myopic thinking and a poor understanding of the investment environment.   

Wary mutual fund investors

To better understand why fund houses’ approach is flawed, let’s step back in time to 2011, a year that proved seminal for the mutual fund industry. After equity markets turned around sharply in 2009 and the continued to fare well in 2010, came the downturn of 2011. Markets posted a loss of roughly 25%; for investors, this proved to be the proverbial straw that broke the camel’s back. Perhaps painful memories of the 2008 global meltdown were refreshed.

Over the next 24 months (Jan 2012 through Dec 2013), the equity mutual funds segment (equity funds, balanced funds and ELSS) witnessed net outflows of roughly INR 275 billion. Such was the pessimism, that investors even ignored the fact that over this period, markets posted a gain of 36%. 

Optimism returned only when general elections approached and expectations of a new government were omnipresent. On the back of markets scaling record highs, the equity funds segment saw net inflows of INR 1,285 billion from Jan 2014-June 2015. But as is often the case, a bulk of the monies came in after the markets had already run up sharply; in effect, yet again investors missed the inflection point.

The need for informed investors

The numbers say it all. The 2011 downturn deterred a substantial number of mutual fund investors for the two subsequent years. Later in 2014, when a ‘hope’ rally set in, investors were willing to return to mutual funds. This isn’t the investment pattern one would expect from informed investors. It wasn’t just mutual fund investors who lost out; declining assets also translated into loss of revenues for fund houses. 

Had the average investor been better informed, the scenario could have been significantly different, and better for both investors and fund houses. Hence the need for fund houses to adopt a more pragmatic approach while spending on investor education. While the present approach of surrogate advertising could yield short-term benefits, it is unlikely to amount to much over the long-haul. 

Don’t get me wrong. I am not suggesting that it is the sole responsibility of fund houses to educate investors. Far from it. The biggest onus is on investors themselves. But fund houses must do their bit as well, because it is in their interest to do so. Simply put, if not philanthropy, commercial interest should motivate them to act aptly. 

For far too long the Indian mutual fund industry has depended on monies from institutional investors who largely invest in debt funds. It is time for fund houses to start paying more attention to retail investors who account for a bulk (roughly 84%) of the equity assets. Not only are equity assets stickier, they also generate more revenue for fund houses (versus debt funds). Prudent investor education initiatives can go a long way in creating a breed of smarter retail investors.   

One of my former bosses used to say “if the investor wins, we all win”. It’s time the mutual fund industry took some inspiration from that quote and treat investor education with the gravity that it rightfully merits.

Data sourced from: www.amfiindia.com and www.bseindia.com