Mutual fund advisors and financial planners believe that profit booking is not the only reason for the sharp fall in mutual fund net inflows in June. They say that investors have lost some amount of trust on mutual funds because of the recent events in the debt mutual fund universe.
“Investors barely regained trust after the previous downgrades because schemes proved their worth. Many investors moved to AMCs which were promising. AMCs like Mirae and IDFC which have taken a concious call to invest only in AAA papers. But Franklin fiasco has hit the investor trust badly and that has showed up in the outflows,” says Chokkalingam Palaniappan, Founder, Prakala Wealth Management, a financial planning firm based in Chennai.
Mutual fund industry has been plagued by some crisis, mostly in the debt side, for the last two years. It all started with the IL&FS fiasco. That triggered a long series of downgrades and defaults by vulnerable financial companies. It also brought to light the dubious practice of mutual funds lending money to entities backed by pledged shares and their inability to use the collateral on the event of defaults. Shutting down of six debt schemes by Franklin Templeton Mutual Fund, citing the liquidity situation in the bond market due to the pandemic, was the last straw, say mutual fund advisors.
Add to that the bleak economic prospects due to the Covid-19 pandemic and the picture is complete. Most industry participants have been anticipating a fall in inflows due to the disruptions caused by the extended lockdown in the lives of regular individuals. Many individuals have lost their jobs, some have suffered pay cuts and starting into an uncertain future. Financial advisors have been asking investors to prioritise creating a large emergency fund to tide over the difficult situation.
“The pandemic has hit most of the salaried class and massively impacted the business class. With no real solution in sight, the confidence of these investors is shaken. There is no vaccine, cases are increasing by the day and many investors still see a possibility of another lockdown happening any time now. Most of the disciplined investors waited a few month hoping this to pass, but now we know it is here to stay for long and that’s what is leading to outflows,” says Santosh Joseph, Founder, Germinate Wealth Solution, a money management firm, based in Bengaluru.
Chokkalingam Palaniappan says that the salary cuts and uncertainties in business has impacted many investors. Some of his own clients have requested to cut SIPs to 25%. “Some investors are panicking, some have actually faced the brunt. Many companies have sacked people and even doctors are facing massive salary cuts. With all this seemingly not ending anytime soon, investors are staying away from committing money to a risky asset class. Moreover, some people are panicking. Those who are not facing big salary cuts and can still continue their investments, want to sit on cash based on advice on the internet.”
Mutual fund advisors also believe that some mutual fund categories like hybrid funds have lost the faith of investors. “Investors had come into this category for dividends, tax-free returns, best of both worlds (equity and debt) and robust returns. After 2017, all of these things have vanished. With time, investors started pulling out their money. In an uncertain environment, the first schemes to bear the brunt would be those which are not performing for a while. Once investors lose confidence, it is very difficult to get them back,” says Santosh Joseph.
Many investors are also extreme confused about the prospects of the markets. They believe the market is likely to fall more because of more lockdowns and economic disruption caused by the pandemic. This is also forcing them to sell their loss-making investments and pause their investments. Then there is the question of trust: they are hurt by low interest rate environment, but do not want tto park the money in debt funds. They are concerned that they will not be able to access the money when they want it.