FOMO has turned traditional investors into MF traders. | Jobs Vox

While the equity mutual fund (MF) sector is gaining strength from a growing secondary market, fear of missing out (FOMO) is gaining strength around investor psychology and shifting traditional investors to MF traders.

A recent survey on the investment status and time horizon of the MF industry under management (AUM) across investor categories threw light on some shocking facts.

About 30% of retail and high net worth investors (HNIs) in MFS divest or rotate equity and equity-oriented investments in less than a year.

This shows that investors are exhibiting short-term trading behavior even in mutual funds with constant inflows and outflows.

Another major finding of the study is even more shocking. It shows that 56 percent of these investors have withdrawn their investment from equity and equity linked MF schemes in less than two years.

Investors only show long term holding in the LSS category when there is a longer mandatory and non-permissive holding period of at least 3 years.

Barring the ELSS category, nearly 62% of equity assets have collapsed in less than 2 years! Now the point to be considered here is why this happened? If an investment doesn’t yield the expected return, possibly due to FOMO, pull out of it and move your funds to something higher.

So basically, an investor starts screaming because of FOMO or because of the advice of the distributor or the investment advisor. No one advises him to stay (be patient) or to go on average (as in direct equity).

Investors find it difficult to resist the temptation to jump from one ship to another and in the process end up with substandard returns after a long period of time.

Much of the retail and some HNI investor thinking is governed by the definition of equity investment in the short-term and long-term horizons as defined in the Income Tax Act, 1960.

The law says that any profit made in an equity investment of one year is short-term capital gain (STCG), and any profit accumulated over a period of one year is defined as long-term capital gain (LTCG).

Another point to note is why 30% of investors exit equity MF investments in less than a year, eroding their investment value.

As it is a well-known fact that equity investment is a long-term investment idea and it pays off in the long term, there is no specific rule set for the duration of equity investment.

The Securities and Exchange Board of India (Sebi), the capital market regulator of India, has laid down specific rules and time limits for investment in debt schemes of MFs. This was done in October 2017, when detailed guidelines on classification and rationalization of MF schemes were issued.

SEBI has set a short tenure of one year to three years in the debt segment. He stated that the average duration is three to four years. He stated that medium to long term investment is between four years to seven years and long term investment is more than seven years.

Asset managers, distributors, advisors and regulators have a major role to play in educating and handholding investors to regulate trading behavior in MFS and bring some stability and discipline to equity investors.

After all, equity mutual funds are good, but only in the long term, say 5 years!

(The author is the founder and CEO of Samco Ventures)

(Disclaimer: The advice, suggestions, opinions and views given by the experts are their own. These do not represent the views of The Economic Times)