Equity Investments : Longer Holding Period Can Normally Ensure Higher Gains..!

Thanks mainly to retail investors, 50% of equity assets in mutual funds (MFs) are held for periods greater than 24 months.

On the other hand, non-equity assets - popular with institutional entities  are primarily held for periods less than a month or / less than a year.

When it comes to equity mutual funds, less than 25% of such assets are held for less than 6 months. Advisers & experts usually ask investors to hold equity investments with 3 to 5 year horizons. And, retail investors seem to be listening.

In a model where distributors get commission for bringing in new investors to schemes, churning of portfolio would ensure lower holding periods. But, as the MF industry inclines towards a full trail commission model, higher holding periods would ensure greater payouts & alignment of interests of investors, distributors & the industry.

From ICICI Pru. MF advt

Despite the average ticket size of retail investors being just Rs. 62,000 compared with a princely Rs. 21 lakh for HNIs, a whopping Rs. 1.3 crore for companies and a massive Rs. 11 crore for institutions, the 'small guy' scores big when it comes to the tenure of investments, industry officials said.

“This is especially true for retail investors, who invest through monthly plans. After a few months, it becomes a saving habit. It’s not a constant yield-searching exercise like it’s for other categories of investors.

Usually, retail is for the long-term and it’s profitable for the industry,” said Mr. Rajiv Shastri, Managing Director and CEO, Peerless Mutual Fund, in a recent interaction.

The fund house shifted to an all-trail commission structure, dis-continuing upfront payments to distributors from last calendar year. Equity funds are very popular with retail investors.

Out of the 4.2 crore investor accounts in the domestic MF industry, nearly 99% is held by individuals. About 80% of the investor accounts are in equity-oriented schemes, 17% of the accounts are in debt-oriented schemes while liquid & money market funds account for less than 1% of accounts.

"Majority of equity funds are held by retail investors and unlike their institutional counterparts (who hold short-term debt), retail investors have a slightly longer holding period in equities as the asset class is typically used for long-term wealth building," Ms. Vidya Bala, Head, Mutual fund research, FundsIndia.com, told Financial Chronicle.

"Having said that, in the Indian context, equity investors are still very short term in their outlook compared with their western counterparts, who have a 20 to 30 year of holding in equities for their long-term goals such as retirement," Ms. Vidya Bala  added.

In the past 13 years, data shows that the probability of losing money as captured by the percentage of negative observations, has been at 25% for time periods of two years, nearly 14% for 3 years & just 7% for 5 years.

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