Soon after the COVID-19 lockdown started in the last week of March 2020, the trouble began for mutual funds on multiple grounds–dwindling physical transactions, cancellation of Systematic Investment Plans (SIPs) by investors (due to job losses, pay cuts, and/or deferred payments), redemption pressure, and risk aversion set in as uncertainty loomed. The Assets Under Management (AUM) of the Indian mutual fund industry, as a result, fell 5% between March and April (despite markets recovering from the March lows).
Nevertheless, with quick and efficient use of technology, mutual fund houses were eventually successful in garnering AUM. During the period of COVID-19 lockdowns, over 90% of the incremental business came through digital means.
Now as the COVID-19 restrictions have eased, the economic activity is gaining momentum ahead of the festive season. With it, investor behaviour has also undergone some changes.
During the quarter of July to September 2020, the share of physical mutual fund transactions, i.e. through the paper mode, recovered after experiencing a decline during Q1FY21. Two fund houses that account for approximately 20% of the Indian mutual fund industry’s total AUM witnessed an average fall of 6.7% in digital transactions during Q2FY21 as compared to that in Q1FY21. The conventional methods are perhaps once again the preferred mode to transact in mutual funds as India continues to unlock from the COVID-19 total lockdown.
Until recently, the paperless transaction was a phenomenon restricted only to some of the large fund houses which had invested heavily in related technologies. And leaving them aside, the industry average of digital transactions in the total transactions has been under 15%, according to a CRISIL report. Until three years ago, the situation was even dire with just 0.5% transactions happening through the digital route.
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What’s the future of digital transactions in mutual funds in India?
The growing popularity of financial assets post demonetisation and rollout of 4G (and soon 5G in the coming months) will provide a significant push to India’s digital economy. The coronavirus pandemic perhaps has taught us a new way of life and technology is playing a pivotal role.
The BSE StAR MF—a browser-based mutual fund distribution platform that allows purchases and redemptions of mutual funds—has witnessed a 6.7% rise month-on-month in the transaction volume in October 2020. Against 71.93 lakh transactions in September, the BSE StAR facilitated 76.74 lakh transactions in October amounting to Rs 22,828 crore.
Apart from that, it enrolled 2.94 lakh new SIPs worth Rs 74.5 crore in October. The platform so far during FY21 has handled 4.76 crore transactions (against 5.75 crore logged in FY20) and now holds the SIP book of 55.68 lakh accounts.
Like StAR MF, other digital platforms might have also gained popularity.
Will investor behaviour change in the post-pandemic world?
I don’t think the wave of digitalization in the mutual fund industry is going to recede anytime soon. In fact, first-time investors who enrolled through digital modes would stick to using digital platforms to do transactions even in the future. Of the old mutual fund investors who tested the digital platforms for the first time during the pandemic have experienced the ease of doing transactions and maintaining records. They might also want to continue using the digital means if their experience has been comfortable so far.
That being said, a certain section of investors, appear slightly hesitant to use digital modes to transact in mutual funds, primarily because of the rise in online frauds. According to the data released by the Reserve Bank of India (RBI) in September 2020, cases of card and internet banking frauds have increased by 43.5% in FY20 as compared to a year before. Such instances may discourage novice investors, especially the first-timers from the non-metro cities to use digital platforms.
How can investors make the best use of digital means to invest in mutual funds?
Merely investing through digital mode isn’t enough as it may not offer you anything more than the convenience if you don’t choose a platform intelligently.
One should ideally use digital platforms to invest in direct plans of mutual funds. If you haven’t heard of them before, direct plans allow you to invest directly in various schemes offered by the mutual funds without involving any broker or an agent.
Typically, the expense ratios of direct plans are far lower than those of regular plans. In the long run, money that you save through the difference in the expense ratios of direct plans and regular plans can make a substantial difference in returns you generate on your investments.
Here’s how you can select the direct mutual fund platform intelligently
You see, the fintech boom has given rise to many new players having no prior experience in the field of mutual fund investing, launching digital services for mutual fund investors. Carrying out the transaction is the last link of investing in mutual funds. The quality of advice cannot be undermined, so as the costs associated with investing.
You should clearly identify your needs. For example, what type of services you are looking for — do you just need a digital platform to transact or you would require thorough research-backed recommendations as well. While you can get platforms that offer you transaction services for free but no unbiased advice; they might not serve your purpose.
It is important that you select a platform that offers you unbiased mutual fund research services and not just a digital transaction platform.
To build a mutual fund portfolio of actively managed funds, here are some guidelines…
- Select suitable and worthy mutual funds schemes with a consistent performance track (based on a host of quantitative and qualitative parameters)
- Give special emphasis on alpha (i.e. outperformance against the benchmark index), the risk-reward ratios, and performance across market cycles
- Each fund should have seen at least 3 market cycles and demonstrated the ability to generate alpha over the market index
- Make sure the selected schemes are managed by experienced and competent fund managers and belong to fund houses that have well-defined investment systems and processes in place
- Not more than two schemes in your portfolio should be managed by the same fund manager
- Not more than two schemes from the same fund house are or will be included in the portfolio.
- Diversify across investment style and fund management
- Ensure each fund in the portfolio should be true to its investment style and mandate
- Have an investment time horizon of at least 5 years when investing in equity-oriented schemes
If you wish to select worthy mutual fund schemes, consider subscribing to PersonalFN’s unbiased premium research service, FundSelect. Each fund recommended under FundSelect goes through our stringent process, where funds are tested on both quantitative as well as qualitative parameters.
Every month, PersonalFN’s FundSelect service will provide you with insightful and practical guidance on equity mutual funds and debt schemes – the ones to Buy, Hold, or Sell. Click here to subscribe to PersonalFN’s FundSelect service.
Remember, a sensible and astute investment approach paves the path to wealth creation and is always good for your long-term financial well-being.
Author: Rounaq Neroy
This article first appeared on PersonalFN here.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.