Retail Investors’ flight from Mutual Funds
Is it advantage Direct Equity?
Retail investors typically buy assets near their peak, be it stocks, real estate, mutual funds. Investors, in general, like to see validation in terms of the price (upward) momentum before committing to an investment.
This is something that did not happen this time. As stock prices skyrocketed, with sluggish company earnings not justifying the high prices, a bunch of retail investors have booked profits and gotten out from mutual funds. The question is,
Has the retail investor finally matured or is there something more to it?
At the same time, we have also witnessed increasing retail frenzy since the lockdown began with a new breed of investors, riding on a wave of liquidity and gamified trading apps, have pumped in a ton of money in direct equities. Yes, for many investors the markets have not disappointed them either, providing a decent return within a short period of time.
Greed & Robinhood
Also, shows like Scam 92, which was based on the Indian stock market scam of 1992 with a clear message of ‘greed is evil’, in effect galvanised the power of easy money. Unable to resist the temptation, a lot of hard-earned money is been channelised into risky asset classes, chasing higher returns without heeding attention to the inherent risks. The GameStop fiasco playing out in the US, is a case in point.
Robinhood, the leading trading app in the US, has been at the centre of the GameStop controversy in the past few months. They announced a couple of weeks back that they are getting rid of the confetti animation that appears on users’ screens after they conduct their first trade and achieve other milestones — that gave a (sedation) dopamine rush.
The change comes as the app faces growing scrutiny over the gamification of trading that masks the potential for real losses in the financial markets. The change is most likely too little, too late.
Investor Behaviour — a case of Narratives and Biases
Understanding the underlying factors of investor behaviour.
Gold and Bitcoin
If we look at gold, it is the antithesis of the global financial system, but the prices have rather disappointed. One explanation for the fall in the gold price possibly lies in the fact that some of the money has moved to bitcoin, another frenzied asset class.
Gold is the antithesis of the global financial system
Cryptocurrencies are highly volatile, as their value is typically not related to any economic fundamentals, as witnessed with the price of bitcoin. They are highly risky as investment products and are not ideal for retail investors — considering the risk appetite and limited capital. Also, the ongoing debate of whether it’s an investment asset or currency is a never-ending one.
Over the years, there had been a sustained effort by the fund industry at large, led by the Association of Mutual Fund in India (AMFI) along with wealth managers and financial planners/advisors encouraging investments through a less-risk averse option of investing through Systematic Investment Plans (SIPs) which is a great tool for wealth creation. The reversal from this can be a severe blow to investor confidence, as and when the markets correct in the short term.
On the other hand, a bulk of investors who sold their equity holdings last year and are sitting on cash, waiting for the right time to deploy it back in the market. The reality is, we cannot time the market. The need is to make good investments consistently rather than wait for that one elusive great investment opportunity.
What are your thoughts?
Until next time!
Disclaimer: The intention of this article is to provide information. Nothing in this article has to be construed as advise or recommendation.
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