Another issue is that even educated investors who understand that 15 per cent annual returns are excellent returns over 8-10 years assume that they will see a steady rise every year, much like a fixed deposit. What they fail to realise is that despite the very high probability of their getting an excellent return of 15 per cent, if they continue to hold on to their equity over 8-10 years, there is an equally high probability that during some periods the value of their investments
will be lower than their cost – in other words, it will be in loss. These investors expect that when the equity markets are doing badly, somehow, their investments
will earn fixed returns. And then, when the markets go up, these investments
will rise exponentially during good times. This mentality is the biggest reason for early exits from equity mutual funds. Those investors who have been primed to expect losses in the short term will wait it out to reap the rewards in the long term. The others, obviously, don’t have the patience.
In such a scenario, investment advisors have a serious role to play. In fact, the industry body – the Association of Mutual Funds in India – should disclose the exit rate data separately for advised equity funds and non-advised equity funds. Advised equity funds should include both - direct funds in which the registered investment advisor code is mentioned or regular funds in which the distributor codes are specified – and the rest can constitute the non-advised category. And it is quite possible that the advised category might show less churn during bad times.
Another thing that needs to be tackled is transparency in payment to investment advisors. There is no reason why a completely transparent arrangement (such as payment of fees by the cancellation of units), also procedurally and behaviourally convenient, cannot be worked out. Many things such as tax implications would need to be sorted out, but in an environment where many new things have been done in India for the first time, this can also be a pioneering effort. If it helps foster and promotes equity culture among retail investors, it will be worth making an effort.
The author is a Sebi-registered investment advisor