Over the last few months, the net inflows into Indian equity mutual funds is showing a downward trend. The gross inflows hover around 60-70,000 crs a month and redemptions are around 30-40,000 crs. So net inflows range from 20-30,000 crs. While redemptions have been happening every month, the outflows in recent months may by due to the flat to negative performance of the equity markets since September 2024 when the indices touched their all time highs.
While we do not know the reasons as to why investors are redeeming, some of them could be due to negative returns whereas some could be due to financial requirements. As per AMFI, 60% of the equity holdings were held for more than two years, whereas forty percent was for less than two years. Of the investments held for more than two years, only 52% was retail and the rest being HNIs or UHNIs. Retail investors are defined as those investing less than Rs two lakhs. It seems that most investors have a short term investment horizon. They are either unaware or not convinced of the power of compounding over a long period of time.
We analysed the annual calendar returns of Nifty 50 for the last fifteen years. Returns ranged from +32% to -23%. There were only two years that gave negative returns. There are many statistics which claim that if you miss the best five, ten or fifteen trading days over a long period of time, then your returns can get impacted by2-4%. Investors either stay invested or it they redeem they will then stay away for a long time. It’s hard to fathom that investors will redeem and then re-invest in a few days. Hence, most investors are likely to stay out for a year or more. Hence we modelled investment returns under two scenarios viz one where the investor stays invested throughout the fifteen year period and the second one where after every year of negative returns the investor redeems and invests after a year. Accordingly, an investor who would have invested Rs ten lakhs on January 1, 2011 would have redeemed on January 1, 2012 as the very first year had negative returns but re-invested on Jan 1, 2013. Similarly, the next year of negative returns was 2015 and the investor stayed out of the equity markets in 2016. At the end of 2025, the investor in the first scenario who stayed invested throughout earned Rs 44.51 lakhs and the one who stayed out for two years earned Rs 40.30 lakhs. The returns of the first investor was 9.78% whereas that of the second investor was 9.1%, a mere 0.7% decrease but more than 40% of the original investment amount. The difference is also 10% of the smaller amount. We have of course considered capital gains taxes for each investor and these amounts are net of taxes.
In the above scenarios, the investor missed out on the return of 29% in 2012 which was the prime cause of the lower return. In the second instance, the investor was better off staying out of the market as the market gave a 4% return in 2016 whereas the investor earned 7% from the debt markets. Hence, just by missing one good year of returns, the investor lost out on 10% of the final returned amount.
Investors rarely miss trading days but its likely that they will miss a few years and as can be seen above, even a one year of missing out can have a large impact on the final amount that is actually earned. Hence it’s best to stay invested in the equity markets unless of course the monies are required for education, weddings, house purchase, etc. As it is rightly said, its not about timing the market but time spent in the market. The more time you are in the market, the higher the chances of earning the market return.
About EquiZen
EquiZen, a registered mutual fund, SIF (ARN-272487 – Sanjay Parikh) and PMS distributor (APRN-00158), offers personalised financial solutions with a focus on safety and transparency. We aim to assist you to achieve financial freedom, the freedom to do what you want and achieve your dreams. We do not push financial products but believe in utilising them judiciously to meet your needs. Learn more at www.equizen.in or contact us via +91 9820605203 or sanjay@equizen.in.
