Retail investors choose equities plans first, then debt funds, and finally money market plans when it comes to mutual fund investment. Exchange traded funds (ETFs) and fund of funds receive the least contribution from regular investors.
Institutional investors, on the other hand, have the exact opposite allocation pattern.
Consider this: Retail investors account for 89 percent of the assets in equity-oriented mutual funds whereas they account for 41 percent of the assets in debt-oriented schemes.
At the same time, exchange traded funds only receive 10% of their funding from individual investors, compared to mutual funds that invest in liquid and money market securities, which obtain only 12% of their assets from small investors (see image above).
Institutional investors, on the other hand, tend to bet more heavily on ETFs, money market funds, debt funds, and finally a much smaller percentage on equity schemes.
Principal justifications for choosing equities mutual funds:
- Retail investors’ long-term perspective
- Distributors urge small investors to invest in equity schemes
- Corporate investors’ time horizons are very short.
- Small investors are already very highly exposed to debt instruments through PPF and FDs.
Exactly why do individual investors adore equity funds?
To determine the causes of this phenomena and the patterns it displays, we attempt to remove some of its outer layers. What makes equity mutual funds so appealing to ordinary investors over other types of investments?
According to Vishal Dhawan, founder and CEO of Plan Ahead Investment Advisors, “One of the main causes of this pattern is that the investment horizon for retail investors is long because the investment is meant for long-term goals like children’s education and retirement, whereas for institutional investors, the funds are earmarked for short duration as a part of their treasury operations. As a result, different investing strategies may be appropriate depending on the investment horizons and time periods.
The co-founder of Samasthiti Advisors, Ravi Saraogi, cites a few factors as to why there is such a distinct difference between retail and institutional investors.
Companies use their corporate treasury to support their investments, and because they need cash for working capital, they choose to invest in liquid or ultra-short-term debt funds. On the other hand, since their objective is wealth development, retail investors prefer to invest in stock programs. Furthermore, the majority of companies rely on distributors who encourage customers to engage in equity plans in order to earn higher commissions. The commission payment and expense ratio are both low in debt funds, according to Mr. Saraogi.
To be able to earn income even on non-working days, they store money in current accounts and invest in debt funds or park in overnight funds. However, because they have already invested in fixed deposits and PPFs, retail investors need to make equity investments in order to build wealth, according to Sridharan.
