Investors and the public markets – A love hate affair

Recently, I was reading a headline from an article that caught my eye – “50% of investors redeem their mutual fund investments within a year: AMFI Data”

While one could argue about the accuracy of the data, being 45% or 55%, this has very strong implications for someone running an Asset Management Company in India. On the one hand, we speak about financialization of assets and the long-term potential of money management in India (which is vindicated by the money that flows into the industry over the last few years). However, there is very little attention paid to the experience of the investor who is putting this money into the markets.

I have always believed that asset management is an anti-scale business. What do I mean by that? It’s a business that scales with the benefit of time since trust takes time to build. Patience is a product of confidence and trust, and the public markets test your confidence at least once a year. Moreover, studying the history of India makes you appreciate that we are a trust deficit country. This effectively means that the two essential ingredients required to build patience work against the investor in the public markets.

Things that are hard naturally present an opportunity to a dogged entrepreneur. While the Mutual fund industry is primed and bound to grow in AUM, the above problem creates a large space for an Asset Management Company to build and scale an institution that works on the experience of the investor and looks at maximising the time an investor spends in the market. (One has to realize that one comes at the cost of the other in the short term – one cannot look at optimising for scale in AUM and managing the client journey in tandem in the short term, as the latter is an anti-scale concept).

So, what makes the Indian investor unique is that we have the lowest ownership of public markets in our portfolio of assets, alongside the least time we spend in the markets staying invested. To understand this, it is important to study the market which has the largest penetration of financialization where the time spent by investors in the markets is roughly 5x that of an Indian investor today (measured by time).

Investors in the US had a significant increase in their ownership of equities through the introduction of 401k which was a programme launched to increase investing and make it long-term (through the tax breaks one gets through thinking long term). If an investor had to take their own decision, the default action would be to pull-out money during any period of uncertainty. However, when there is an incentive to keep investing (in the form of long-term tax breaks), the benefits become evident.

Since 1998, Gallup has asked Americans about their stock ownership as part of its annual Economy and Personal Finance survey. The Great Recession scared a lot of folks out of the market, depressing ownership levels for more than a decade; it got as low as 52 percent in 2013 and 2016, according to Gallup’s most recent poll, taken in April. Those who pulled back during that time or never jumped in missed the recovery that peaked in 2022 when the Dow Jones Industrial Average had a record market closing in 2022. Sixty-one percent of U.S. adults say they have money in the stock market, either as an individual stock, a mutual fund, or a self-directed 401(k) or IRA plan. It’s the highest level since 2008.

“When you look at 401(k) participant behavior, you tend to see a very pleasing pattern of investors buying, and buying some more, and just hanging on,” Benz said. “They’re not paying close attention to what’s going on with their accounts on a day-to-day basis, and that redounds to the benefit of their long-run returns and financial well-being.” (Benz is the head of personal finance and advisory at MorningStar, a leading advisory and rating firm in the US).

For India, to have a similar trend to what US saw over the last 20 years, one needs some of the following to come through:

While the base effect is low in India and the AUM into financial assets will increase in the Indian markets, there is a significant opportunity for an Asset Management Company to focus on the investor journey and increase the longevity of the investor through a right mix of communication, performance and setting the right expectations – this is the space that Itus operates today.

From the regulator’s perspective, the large elephant in the room is to think of an equivalent of 401k for India which incentivizes long term investment. The current data points do not give confidence to the long-term investment duration of the investor yet.

Finally, the possibility of creating a staggered taxation structure, could help where the government provides a taxation slab of tax exemption for investments made for a duration > 10 years. This will incentivise investors to allocate a proportion of their capital in the bucket which takes advantage of this and potentially create wealth too that would be beneficial for capital markets and the economy at scale.

While the next decade is going to be a strong period of India and investing, there certainly is a significant opportunity to think out-of-the box to take advantage of this period from a multiple stakeholder perspective.

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