The share of retail investors in total assets under management (AUM) of mutual funds surged past 60% for the first time in December 2023. This occurred due to the rally in the equity markets and strong flows from retail investors into equity schemes. Earlier, retail and institutional investors had a 50% share of each of the total AUM in June 2020.
Another reason for retail dominance is outflows from debt mutual funds amid low returns and changes in tax norms. This included taking away indexation benefits on long-term capital gains and now taxing all gains from these funds at slab rates.
Debt mutual funds gained the bulk of their flows from institutions. Investors have pulled out Rs 3 lakh crore from debt funds over the past three calendar years, that is, from 2021 to 2023.
Since retail investors have taken to mutual funds in a big way, they should focus on developing an asset-allocated portfolio with an allocation to all three major asset classes: equity, debt, and gold.
Within equity, investors are required to diversify their holdings across large-, mid-, and small-cap funds. They are also required to have exposure to international funds for geographical diversification within their portfolios.
Within debt, investors should have the bulk of their money parked in less volatile, shorter-duration funds, which could have a portfolio duration of up to one year. The choice of fund category needs to align with their investment horizon.
Limited exposure should be taken to long-duration funds, which can offer capital gains in case rates are cut this year but can also be volatile. At the same time, exposure to credit risk funds should be limited, which should be depending on risk appetite.
Before investing in gold, long-term investment should be initiated through sovereign gold bonds (SGBs) while shorter-term investment should be made through gold exchange-traded funds (Gold-ETFs), which tend to offer easy liquidity.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.