Chart of the day : Why is the number of new investors in mutual funds coming down?

Asset management companies (AMC) would have realized that Indian investors are now better informed than they were earlier. Rather than blindly investing in any fund, they now check the performance of funds before investing.

A poor performance by several mutual funds in FY23 saw investors shying away from investing in them. With most funds underperforming the benchmark indices, investors preferred a direct mode of investment rather than giving their money to AMCs.

Industry data shows that in the first six months of calendar year 2023 only 1.6 million new unique investors have signed in. Though slightly better than the six-month period ending December 2022, new investors are sharply lower from 4.7 million in first half of 2022 and 6.7 million in December 2021.

Poor performance is the main reason for new investors to shy away from mutual funds, despite a steady increase of existing investors’ investment through Systematic Investment Plan (SIP), which is now around Rs 14,000 crore, most of which are in smaller cap funds or passive funds.

Besides poor performance, a rise in interest rate has diverted investor funds to the fixed deposit market. With interest rates rising, especially in shorter tenure deposits, funds have been diverted to this market.

Another reason cited by experts is lower new fund offerings (NFOs). On the back of poor performance, AMCs did not tap the market with new fund launches to attract new investors. NFOs have traditionally been the best mode of attracting new unique investors.

With the performance of funds improving in the June quarter, AMCs are readying new offerings that can bring in a new tribe of investors.