Investors getting smarter with falling mkt

Investors getting smarter with falling mkt
17 Aug, 2007, 0945 hrs IST,

Equity fund investors are reacting differently to stock market
corrections . While in the past, they mimicked Sensex behaviour,
redeeming units whenever market corrected and vice versa, they are now
behaving differently. They have now begun to adopt contrarion
investing strategies. They are buying equity fund units whenever
markets fall with a thud.

This trend is noticeable from the eight-year monthly study of
investing pattern of equity fund investors (as known from net inflows
into equity funds) and Sensex performance . With the strong (and
extended) rally happening in the stock markets, overall investor
sentiments seem to have changed for the better. So in the May 2006
correction, when the Sensex corrected 13.7%, there was additional
inflow of 10.8% into the equity assets . Even in Oct 2005, when Sensex
was down 8.6%, there was additional 4.7% inflow into equity funds.

Investors are also getting smarter. They have been using market
corrections to enter the market. This was not the case in 2003 times,
when the equity market in India had just begun its ascent.


An 8-year study shows that investors' reaction to market falls has
changed. They are today using such corrections to buy into equity
funds. Previously, they exited on slight signs of correction. Greater
investor confidence, thanks to extended bull rally, seems to be behind
the change in strategy.
In May 2004, when Sensex tumbled by nearly 15.8%, the net inflows into
the mutual fund industry were reported at around 4.2%. This figure was
higher when compared to the usual monthly inflows that lay in the
range 0.5%-3 .7% then. While this trend has been repeated quite often
thereafter, the inflows to the mutual fund industry in May 2006 was
very different. There was an inverse correlation between the market
falls and the mutual fund inflows.

Two, those who have benefited from the bull run and are waiting for
further corrections to invest more. All these investors fundamentally
believe in the Indian growth story and are therefore using these
corrections to buy more mutual fund units.

If one were to look at the top ten Sensex falls (monthly) and compare
that with the mutual fund inflows, one could see that in the last four
big Sensex falls, mutual fund investors have only pumped in money on a
net basis. And the extent of investment in percentage terms has only
increased over time. In the February 2007 Sensex fall of 8.2% though
the mutual fund investors didn't buy as much.

While the contrarion investment strategies of buying low and selling
high is good, it also seems that the equity investors are getting used
to the bull run. In the last four and a half years, equity markets in
India has only gone up and somehow investors feel that any such
corrections and the market would ultimately only bounce back.

This is not necessarily a good sign. Even in the technology crash of
March 2000, there was huge inflow into equity funds - 10.3% to
precise. In the month of March 2000, sensex fell 8.2%. So, the big
question is the history repeating itself? And more importantly , would
that make the investors change their investing behaviour?