In recent decades, many Indians have been cautious of the stock market. The Harshad Mehta scam (1992), Dotcom crash (2000), and mortgage crisis (2008) have all undermined investors’ wealth and led to several bankruptcies. Mutual funds, too, suffered a significant loss when Unit Scheme 64 collapsed in 2001. A lot of investors who had put their money into this plan had to suffer a significant loss. Due to the Indian stock market’s boom and bust cycles, the common investor has always been fearful about investing in stocks and shares.
There is also the issue of herd mentality when it comes to stock market investments. As the index increases, novice investors rush in. When it falls, they stay away. Some people panic and sell. However, behavioral economics explains that small investors do not sell when they should because they have a bias known as “loss aversion”. Studies showed that we appreciate what we have far more than what we don’t have. We do not like to book a loss on a stock. And we wind ourselves holding on to bad stocks for far longer than we should.
This is where mutual funds and professional investment managers outperform individual investors. The fund manager is unconcerned about purchasing and selling. They may have certain favourites, but they follow the principles. They virtually always outperform the average investor (I can hear your mind voice that simple index funds often perform better than schemes managed by experts. I also agree with your mind voice, but that topic is for some other day to discuss and not in this blog-post).
The Association of Mutual Funds in India (AMFI) has done an excellent job of promoting the mutual fund culture. Their campaign tagline “Mutual Funds Sahi Hai” is now a well-known catchphrase. The other effort they made is much more remarkable. They have made a significant push for SIP, or Systematic Investment Plan. You invest the same amount of money each month, regardless of market fluctuations. SIP appears to be gaining popularity among Indian investors. By doing SIPs, money inflow into mutual funds do not follow the market’s ups and falls. This benefits investors through rupee-cost averaging, which involves investing a given amount of money at regular intervals irrespective of market movements, allowing investors to buy more units when the market is low and less units when the market is high.
Still, mutual funds have not enjoyed success yet. The Reserve Bank of India’s statistics on household financial savings presents a different view. Indians make significant investments in gold and real estate, but when we exclude those and focus just on financial savings, the picture is not encouraging. The majority of savings are concentrated in the usual traditional categories: bank deposits (35%), life insurance (18%), and provident fund/public provident fund (22%). These three combined account for a staggering 75%. Mutual funds earn a decent 6%, while modest savings accounts yield 7%. Pure equity investments are just 1 percent.
Mutual funds are gradually becoming more understandable among savers. Mutual funds have surpassed life insurance in the last five years and could surpass life insurance payments by 2027. The mutual fund industry can be legitimately proud of its collaborative efforts (along with the regulators) to bring about a gradual shift in public perception of mutual funds.
App-based trading has opened the barriers, and if we look at the growing number of demat accounts, we may expect a significant increase in direct equities investments and exchange traded funds.
However, one caution persists. Investors are often unaware of the dangers associated with SME IPOs, derivatives trading, and intraday trading, which can lead to capital losses. If this trend of doing intraday trading or derivatives trading keeps going, novice investors will lose money, and the cycle will repeat itself, with people returning to more secure assets such as fixed deposits, gold, and so on, despite the fact that this behavior of investors trading stocks or derivatives has nothing to do with mutual funds.
