Making Traders Out Of Investors

The mutual fund investors are set to get the convenience of online trading platform. While it may make life easier for retail investors, the industry may end-up turning traders into investors, as it happened in equity markets, says Krishna Kant

WILL the mutual funds now go the way of equities? Right now investment in mutual funds involves quite a bit of paperwork. The prospective investors have to visit a distributor's or the asset manager's office, fill out a series of long forms and then sign a cheque of the amount he/she wishes to invest in the fund. This makes mutual fund investments time and labour intensive process. In contrast, investment in equities is as easy a click on the mouse or making a phone call. The only time an investors has to bother about the paper works is when he/she is opening the trading and demat account for the first time. Once the account gets activated, investors just have to give his/broker an instruction either on the phone or through the internet. The money is automatically debited or credited from the investor's bank account. 
    This seamless environment has made equities one of the most no-nonsense assets to own. The investors can exit from the counter at the click of a button or by a phone call. The ability to engage in high frequency trading has sent trading volumes on stock to record levels, which in turn has made equity brokering one of the fastest growing and lucrative business in India. Now the same convenience is about to come to mutual fund investors as well. The industry regulator Securities & Exchange Board of India (SEBI) has given I for in principal introducing approval online trading platform for mutual fund units and the platform could become a reality as early as January next. While the SEBI and the fund manufacturers (assets management companies) intend to make life easier for mutual fund investors, they may end-up turning traders out of investors. 
    To appreciate this, consider what happened to retail investors in the equity markets. In the old days of paper share certificates and physical delivery of shares, it was a logistical nightmare to buy and sell shares in quick succession. The time and effort involved in this entire process discouraged retail investors to trade and most of them used to stay invested in a stock for a long-time. This was beneficial as shareholders could fully participate in the growth of a company and could count on steady income in the form of annual dividend payouts. 
    But like in every sphere of life; too much of convenience is bad for health and this is precisely what has happened to retail investors. A greater number of retail investors used the convenience provided by the online trading platform to cash out of their investment during the bull-run rather than use build a portfolio for the long term. This is shown by the adjoining chart where we have plotted historical trend in the value of retail shareholder's equity holding against its share in the total market cap. The data is for a sample of India's top 70 companies and it includes all big and established companies. 
    As it is evident from the chart, retail shareholders have gradually lost their importance in the market. In quarter ended March 2001, retail investors on average owned 18% of India Inc. Their ownership is now down to 12% and is falling every quarter. The chart shows that initially the retail participation showed resilience and a marginal rise in 2001 but then it began to fall a bit in the beginning and then the pace accelerated from the second half of 2003. The trend closely follows the spread of online trading in the country. While in many cases the fall in retail holding can be attributed to the issue of new shares by the companies, in most large counters retail investors have cut down their exposure. Take for instance, Grasim Industries –one of the top performing stocks in last 6-7 years. From early 2001 to now, retail equity holding in the stock is down 43%. A similar trend is visible in other blue chip stocks such as ACC (-60%), Apollo Hospitals (-48%), Castrol (-53%), Colgate Palmolive (-42%), Tata Motors (-), Hero Honda (-60%), GE Shipping, GSK Consumer (-36%), Nestle India (- 27%), Tata Power (-32%), SAIL(-45%) and Tata Tea (-35%), among others. 
    The conclusion is clear. The convenience of anytime and anywhere buying and selling turned retail investors into traders. Rather than building a portfolio for long term and see it grow, they got into the rush to take advantage of market volatility, but ended up losing ground to other classes of investors. 
    The same story is likely to get repeated in the mutual funds now. The advent of online trading platform will induce many retail investors to use various mutual funds schemes as mini indices to take advantage of the market volatility. Some of them may make money in the process but most retail investors are likely to be on the losers' side. The only people who will benefit from this trading will be brokers/distributors and funds houses. While the former will earn a commission on each buy and sell transaction, latter will earn from exit load in case of pre-mature withdrawals. 
    While this reasoning should not be held against the advancement of technology, the experience of the equity market should warn the regulator and the industry about the unintended consequences of the new move. 
    krishna.kant@timesgroup.com