When it comes to investing in mutual funds, retail investors opt for equity schemes followed by debt funds and money market schemes. The least contribution of retail investors happens in the exchange traded funds (ETFs) and fund of funds.
Conversely, the allocation pattern of institutional investors is completely opposite.
Sample this: Equity-oriented mutual funds receive 89 percent of their assets from retail investors whereas debt-oriented schemes get 41 percent of their assets from individuals.
At the same time, liquid and money market mutual funds receive only 12 percent of their assets from small investors (see pic above) whereas exchange traded funds get a mere 10 percent of their funds from individuals.
Conversely, institutional investors place their higher bets on ETFs, money market funds, followed by debt funds and finally a diminutive portion in the equity schemes.
Key reasons for opting for equity mutual funds:
|Long term horizon of retail investors
|Distributors push equity schemes to small investors
|Time horizon of corporate investors is ultra short
|Small investors already heavily exposed to debt instruments in form of PPF and FDs
Why do retail investors love equity funds?
We try to peel some layer off this phenomenon to ascertain the reasons behind this pattern. Why do retail investors love to invest in equity mutual funds over other categories?
Vishal Dhawan, Founder and CEO of Plan Ahead Investment Advisors, opines, “One of the biggest reasons for this pattern is that the investment horizon for retail investors is long as the investment is meant for long-term goals such as children’s education, retirement, whilst for institutional investors, the funds are earmarked for short duration as a part of their treasury operations. Thus, the different investment horizons and time periods could lead to a different investment strategy.”
Ravi Saraogi, Co-founder of Samasthiti Advisors, mentions a couple of reasons for this clear divide between retail and institutional investors.
“The investment money of companies comes from corporate treasury and they prefer to invest in the debt funds — liquid or ultra short term since they need money for their working capital requirement. Retail investors, on the other hand, like to invest in equity schemes since their goal is wealth creation. Also, most of them depend on distributors who get more commission by nudging them into investing in equity schemes. Expense ratio is low in debt funds and so is the commission payout,” explains Mr Saraogi.
Sridharan S., Founder of Wallet Wealth, echoes somewhat similar sentiments when he says that corporates park their money in debt funds because they need money in the short-term.
“They keep money in current account and they invest in debt funds or park in overnight funds to be able to earn interest even during non-working days. On the other hand, retail investors are already exposed to debt investment via their investment in PPF and fixed deposits, so they need investment in equity for wealth creation,” says Sridharan.