80% investors in direct plans pull out money within a year

Retail investors, who invest directly, are more likely to panic and pull out of their mutual funds during volatile markets, compared to those advised by distributors.

According to data presented by registrar and transfer agent Karvy, over 80 per cent of mutual fund investors who opt for direct plans — bypassing the advice of a distributor — pull out their money within a year of investment. The corresponding figure for investors who opt for the regular plan, taking advice of distributors, is between 28 per cent and 36 per cent, depending on market volatility. During volatile markets, almost 60 per cent of redemptions were in less than three months.

Independent financial advisors (IFAs), who distribute mutual funds, argue that data proves that as soon as the market turns volatile, direct investors decide to move out of mutual funds, while distributors are seen as being able to convince their client to stay invested.

Different version

According to the Foundation of Independent Financial Advisors (FIFA), during both the periods, investors had redeemed only after five years. “In fact, approximately 40 per cent of IFAs’ investors had a holding period of more than two years,” FIFA argued in a recent letter to the securities market regulator SEBI.

However, voices from the mutual fund industry don’t wholly agree with this theory. Jimmy Patel, CEO, Quantum Mutual Fund, said that the churn rates at their fund house are very low. “In fact, we have seen our investor base swell to 50,000 now and are seeing net positive inflows.”

Quantum sells its plan almost exclusively online, and most investors buy their funds directly. Quantum does not pay commissions to distributors.

Distributors are paid a commission by mutual fund houses for each product they sell to an investor. Over the last six months however, SEBI has been voicing its concerns over the incentive structure for distributors and now wants to prohibit them from giving investment advice. It wants investors to instead go to trained professional advisors and receive investment advice for a fee.

IFAs believe that such a move could put many distributors out of business, leading to an overall fall in penetration of the mutual fund industry.